What is Divergence
Divergence is said to happen when the price of a stock, future, commodity or crypto is moving in the opposite direction than an applied technical indicator for the same period and timeframe. For example, if price is moving up and RSI is going down, and RSI divergence is happening. Similarly, it may another indicator like MACD, On Balance Volume (OBV) and any oscillator.
Fig 1: In the chart above, price is moving down as indicated by the trendline, while RSI is not going down. In fact RSI reached a higher point at the corresponding lowest level of price, showing clear divergence.
Types of Divergence
There are primarily two types of divergences – Bullish or Positive divergence and Bearish or negative divergence. A bullish divergence indicates that price should now be going up as per the divergence and bearish divergence is reverse of possible and indicates probable down movement. Fig 1 above is type of bullish or positive divergence since it predicted the up reversal movement.
Fig2: A negative/bearish divergence indicates probable down reversal. The above chart shows a clear negative divergence when price goes higher but RSI is coming down.
Divergence can also be classified as Classic Divergence and Hidden divergence. All discussed till now here are classic divergences. We’ll talk about Hidden Divergence later.
What does a divergence indicate?
A diversion, when happening indicates that the current trend sentiment is weakening and a reversal may happen.