A divergence can be identified by a thick red line, a by a green line.
When there is a divergence, it is likeley that the current trend will change it's direction.
Looking at the chart, there are three divergences that need to get interpreted:
1) divergence, is overbought but does not clearly indicate a trend change. Right after the divergence, price and momentum are going up. No clear signal for a sell trade
2) divergence, still overbought, histogram peaked, crossed the signal line, price and momentum are going down. Very clear constellation for a sell trade.
3) two diverences, is oversold, crossover near the end of the second divergence, price and momentum started rising. Good constellation for a buy trade. Could act as exit signal for the beforementioned sell trade.
More information on the Jeddingen Divergence is available here: http://www.forexpython.com/strategy
//@version=2 study(title="Stefan Krecher: Jeddingen Divergence", shorttitle="Jeddingen Divergence", overlay=true) candles = input(title="Number of candles that need to diverge", type=integer, defval=5, minval=3, maxval=10) linregPrice = input(title="price related linear regression length", type=integer, defval=20, minval=5, maxval=50) momLength = input(title="momentum length", type=integer, defval=10, minval=2, maxval=50) jeddingen(series) => ((falling(series, candles)) and (rising(mom(series, momLength),candles))) or ((rising(series, candles)) and (falling(mom(series, momLength),candles))) srcDiv = close lrDiv = linreg(srcDiv, linregPrice, 0) lrDivColor =if(jeddingen(lrDiv) == true) rising(lrDiv, candles) ? red:green else na plot(lrDiv) plot(lrDiv, color=lrDivColor, linewidth=4)
To adapt the strategy to a special asset/ TF I would play with the RSI and MACD histogram levels, and maybe with the properties that relate to the divergence (e.g. how long must price and momentum diverge?).
I'll come back to SPY later this week. Schönen Abend noch ;-)
I draw some very basic trendlines with an online drawing program - have a look at it here:
This is based upon Rob Bookers Trifecta system looking at trendline breaks after a Knoxville Divergence.