In technical analysis, divergence is an important analytical method used to judge the reversal or continuation of market trends. The following is a detailed introduction to divergence:
Definition
Divergence refers to the situation where the price trend and the technical indicator show opposite trends. Under normal circumstances, the technical indicator will rise or fall correspondingly with the rise or fall of the price. However, when divergence occurs, the price makes a new high or low, but the technical indicator fails to make a new high or low synchronously, thus forming a divergence phenomenon.
Common Types
Bullish Divergence (Top Divergence): When the price continues to rise and makes new highs continuously, but the corresponding technical indicator (such as MACD, KDJ, etc.) does not follow the price to make new highs. Instead, it shows a gradually declining trend. This is bullish divergence. Bullish divergence is usually regarded as a signal that the upward momentum of the market is weakening, indicating that the price may be about to reverse and fall. For example, in an uptrend, the stock price keeps making new highs, but the red bars of the MACD indicator gradually shorten, or the intersection points of the DIF line and the DEA line are getting lower and lower. This forms a bullish divergence.
Bearish Divergence (Bottom Divergence): Contrary to bullish divergence, bearish divergence means that the price continues to fall and makes new lows continuously, but the technical indicator does not make new lows synchronously. Instead, it shows an upward trend. Bearish divergence is generally considered a signal that the downward momentum of the market is exhausted, suggesting that the price may be about to hit the bottom and rebound. For instance, in a downtrend, the stock price keeps making new lows, but the J value of the KDJ indicator becomes sluggish in the oversold area and then starts to rise, or the RSI indicator forms a pattern where each bottom is higher than the previous one at a low level. This is the phenomenon of bearish divergence.
Formation Mechanism
Change in Market Sentiment: In the later stage of a market rise or fall, investors’ sentiment often shows differentiation. Although the price is still rising or falling, some investors have begun to doubt the sustainability of the market, resulting in a gradual change in the buying and selling forces. This change in sentiment will be reflected in the technical indicators first, thus forming divergence.
Change in Capital Flow: With the development of the market trend, the flow of funds will also change. When the main funds start to gradually withdraw from the market, although the price may still be rising by inertia, indicators such as trading volume will gradually shrink, which in turn leads to a divergence between the technical indicator and the price trend. Similarly, at the market bottom, when the main funds start to quietly lay out, they will drive the technical indicators to improve before the price rises significantly.
(1) Nasdaq 100 futures (2020, Daily Chart)
During the outbreak of the COVID-19 pandemic in 2020, the Nasdaq 100 futures were heavily sold off due to panic sentiment, and a bearish divergence formed during this period. The trend of the Nasdaq 100 futures diverged from the KDJ indicator, and then it rebounded strongly.
(2) Nasdaq 100 futures (2022, Daily Chart)
From January to June 2022, the Nasdaq 100 futures formed bearish divergences several times. The trend of the Nasdaq index diverged from the RSI (Relative Strength Index) indicator, and then several rebounds occurred.
(3)TSLA (2024-2025, Daily Chart)
In the first half of 2023, Tesla’s stock price experienced a significant increase. From June to July, a bullish divergence formed, with the stock’s trend diverging from the RSI (Relative Strength Index). Subsequently, the stock price entered a period of adjustment.
(4)TSLA (2024-2025, Daily Chart)
In the second half of 2024, Tesla’s stock price saw a significant increase. After that, a bullish divergence formed, with the daily trend of the stock diverging from the RSI indicator. Subsequently, the stock price entered a period of adjustment.
