Divergence is one of the most reliable chart patterns in technical analysis. It occurs when the price of an asset moves in the opposite direction of a technical indicator, usually a momentum oscillator like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD). This disagreement indicates that momentum is slowing down and a price reversal may be imminent.
Types of Divergence
Divergence can be classified into two primary categories: Regular and Hidden, each signaling a different market scenario:
- Regular Bullish Divergence: Price makes lower lows, but the oscillator makes higher lows. This indicates selling momentum is weakening, signaling a potential upward reversal.
- Regular Bearish Divergence: Price makes higher highs, but the oscillator makes lower highs. This indicates buying momentum is slowing down, signaling a potential downward reversal.
- Hidden Divergence: Signals trend continuation rather than reversal. Hidden bullish divergence occurs when price makes higher lows, but the oscillator makes lower lows.
