Serial Indicator: Divergences
Divergences are not an indicator because they are not mathematically formed. But the divergence reading requires an indicator and a price chart. Often also referred to as leading indicator.
Divergences refer to the difference in movement between the oscilator indicators, such as MACD, CCI, RSI, Stochastic, and others with the price action graph of the underlying financial instrument.
Basically, indicators and prices will move in the same direction and have similar shapes in movement. Well, divergence arises or occurs when the price moves to make the highest position or the lower or higher lows while the oscilator indicator is not like that. This indicates a weakening in the movement of price trends and can be a sign that the trend is going to end soon. In other words, divergences indicate that there is an indication of a trend reversal of a trend that could have occurred but that does not mean it will happen. For this reason chartists often resort to trend lines, chart patterns and candlestick patterns as entry guides.
Divergences can be either bullish or negative (bearish). Or chartists often refer to it as bullish divergence and bearish divergence.
Positive Divergences (Bullish)
A positive or bullish divergence occurs when the price is going down, when the price prints a lower low which is not confirmed by the oscilator indicator. This indicates a weakening in the downtrend as the seller decreases or the buyer begins to emerge. When the oscillator fails to confirm the lower lows on the price graph, it can make higher lows, more significant, or can make double bottom or even triple. The latter is more common in oscillators, such as RSI and Stochastics in range (0-100) and less often on oscillators such as MACD and CCI that are not in range (0-100).
Negative Divergences (Bearish)
A negative or bearish divergence occurs when the price is on an ascending trend, when the price prints a higher higher position unconfirmed by the oscilator indicator. This indicates a weakening in the uptrend as buyers are reduced and sellers begin to emerge. Similar to positive divergence, the oscillator may fail to confirm higher highs on the price chart by generating higher, more significant prices, or by making double or triple tops.