Step 5: The Final Phase—Divergence of RSI Versus Price

Figure 6.59 clearly shows the concept of this final divergence. As the RSI and the price retest their prior respective resistance points, they diverge in direction. As the RSI reading reverses after testing the 70 limit, the price action “spills over” the prior high in an attempt to continue the predominant trend. The “spillover” rally usually experiences a brief move above the prior high to either a 1.13 or 1.618 extension of the initial breakdown (X-A).

Figure 6.59.

Later in this chapter, I will outline the rules that distinguish which harmonic projection works with the final divergence phase. But, the beauty of this technical phenomenon is that the breakout is inherently flawed due to the RSI failure, as the “internal strength” no longer supports the predominant trend. It is in situations like these where the general technical divergence between the RSI and the price offers tremendous trading opportunities.