As of 09/26/2022
  Indus: 29,261 -329.60 -1.1%  
  Trans: 11,999 -129.90 -1.1%  
  Utils: 953 -25.04 -2.6%  
  Nasdaq: 10,803 -65.01 -0.6%  
  S&P 500: 3,655 -38.19 -1.0%  
YTD
-19.5%  
-27.2%  
-2.8%  
-30.9%  
-23.3%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow1,000 or 950 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/13/22
As of 09/26/2022
  Indus: 29,261 -329.60 -1.1%  
  Trans: 11,999 -129.90 -1.1%  
  Utils: 953 -25.04 -2.6%  
  Nasdaq: 10,803 -65.01 -0.6%  
  S&P 500: 3,655 -38.19 -1.0%  
YTD
-19.5%  
-27.2%  
-2.8%  
-30.9%  
-23.3%  
  Targets    Overview: 09/15/2022  
  Up arrow32,000 or 29,200 by 10/15/2022
  Up arrow13,800 or 11,800 by 10/15/2022
  Up arrow1,000 or 950 by 10/15/2022
  Up arrow11,975 or 10,700 by 10/15/2022
  Up arrow3,800 or 3,500 by 10/15/2022
CPI (updated daily): Arrows on 9/13/22

Bulkowski on Bullish and Bearish Divergence

My book, Trading BasicsTrading Basics: Evolution of a Trader book., discusses divergence in the section titled, "Is Indicator Divergence a Dud?" starting on page 86.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Divergence occurs when an indicator trends in one direction and price trends in another direction. Specifically, an indicator will make lower highs while price makes higher peaks, or the indicator will make higher valleys even as price tumbles to new lows.

Divergence is a reliable trading signal, but it's not timely, meaning that price usually follows the direction of the indicator, but it make take months before it does.

Bearish Divergence

Bearish divergence.

Bearish divergence (see adjacent chart) occurs when price makes a higher high but the indicator forms lower highs. The two data streams diverge in direction. Price will eventually, usually, follow the indicator lower.

 

Bearish Divergence: Identification Guidelines

CharacteristicDiscussion
Price trendUpward forming higher peaks.
Indicator trendLower peaks.
One monthI found that the best divergence signals in the RSI and CCI indicators are when the peaks are spaced less than 2 months apart – 1 month apart is best (daily charts only).
TrendsDraw a trendline along the price peaks and it should slope upward. A trendline drawn along the indicator peaks should trend downward. Don't draw trendlines along the valleys when looking for bearish divergence.

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Bearish Divergence: Trading Tips

If the price trend is up, then look for divergence among the peaks, not the valleys. When you spot divergence, recognize that the price trend may change. This doesn't mean an immediate sale, but you should be ready to flee.

Bullish Divergence

Bullish divergence shows

Bullish divergence (see adjacent chart) occurs when price makes a lower low but the indicator forms higher lows. The two data streams diverge in direction. Price will eventually, usually, follow the indicator higher.

 

Bullish Divergence: Identification Guidelines

CharacteristicDiscussion
Price trendDownward forming lower valleys.
Indicator trendHigher valleys.
One monthI found that the best divergence signals in the RSI and CCI indicators are when the valleys are spaced less than 2 months apart – 1 month apart is best (daily charts only).
TrendsDraw a trendline along the price valleys and the trendline should slope downward. A trendline drawn along the indicator valleys must slope upward. Don't draw trendlines along the peaks looking for bullish divergence.

Bullish Divergence: Trading Tips

If the price trend is down, then look for divergence among the valleys, not the peaks. When you spot divergence, recognize that the price trend may change. This doesn't mean an immediate buy, but consider taking a position soon, especially if you receive other confirming signals.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com If you buy ANYTHING while there, they pay for the referral.
Legal notices: "As an Amazon Associate I earn from qualifying purchases." Paid links).

My novels:  Bedroom to Boardroom book Remember Me book Bumper's Story book Head's Law book
My stock market books:  Chart Patterns: After the Buy Getting Started in Chart Patterns 2nd edition book Trading Basics book Fundamental Analysis and Position Trading book Swing and Day Trading book Encyclopedia of chart patterns book Encyclopedia of Chart Patterns 3rd Edition book Trading classic chart patterns book

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