Under which condition should a trader sell when using the divergence index?

The correct choice indicates that a trader should sell when the Divergence Index (DI) moves above the upper band in a downtrend. This scenario is significant because it suggests that despite a prevailing downtrend, momentum is showing signs of strength or a potential reversal, which could be a problematic signal for a trader holding long positions.

In downtrends, when the DI crosses above the upper band, it usually indicates that the market is overbought. This could trigger a sell signal based on the assumption that the upward price movement in an existing downtrend might soon lose momentum and reverse. Therefore, selling in this situation could help the trader to avoid further losses as the market tends to react sharply to overbought conditions.

This concept is rooted in the principles of divergence, where price action and momentum indicators like the DI diverge from each other, often suggesting an impending reversal. The context of a downtrend reinforces the potential for a price pullback, making selling under this condition a strategic decision to capitalize on the expected change in momentum.