We are often asked what indicator to use to determine if two time series are converging or diverging. It is really pretty simple. If the absolute value of the spread between the two is increasing, you have divergence. If it is decreasing you have convergence.
Click here to download a sample release 6 chart to that illustrated the concept.
The top subgraph plots both CSCO and MSFT. The first subgraph below that shows the absolute value of the spread, which is increasing for divergence, and decreasing for convergence.
In order to test analytically which way the abs(spread) is going you might want to measure its slope (over some period of time, which you can choose). That is done in the third subgraph with the Linear Time Regression (slope) indicator. If the slope is increasing (blue), you have divergence. If the slope is decreasing (red) you have convergence.
The next subgraph gets even more analytic by using the change of the slope (over a small period) to show positive values (blue) during divergence, and negative values (red) during convergence.
In the final subgraph, we produce an easy to test indicator. It is 1 for divergence, and -1 for convergence.