Divergence occurs when an asset's price moves in the opposite direction of a technical indicator, often hinting that the current trend is losing steam. When it suggests an upcoming upward move, it's called bullish divergence. Traders treat it as a leading signal for possible trend reversals or continuations.
How to Spot Bullish Divergence
To find bullish divergence, compare the lows of both price action and an oscillator. Connect two or more bottoms using candlestick bodies, not wicks. Most traders use momentum oscillators, with the Relative Strength Index (RSI) being the most common. Higher time frames, like daily or weekly charts, tend to yield more reliable divergence signals.
Strong (Classic) Bullish Divergence
Price makes a lower low while the oscillator prints a higher low. Sellers are losing momentum even as price sinks lower, often signaling a potential bottom in a downtrend. After spotting this, traders look for reversal candlestick patterns as confirmation and watch resistance levels. A breakout with rising volume strengthens the signal. Common entry points: the first green candle close or after a resistance breakout.
Medium Bullish Divergence
Price forms a double bottom, but the oscillator makes a higher low. In this case, the price bounced off the lower resistance but reversed at a higher one, failing to fully flip the trend. Divergence hints at a momentum shift, but not necessarily a complete reversal.
Weak Bullish Divergence
Price reaches a lower low while the oscillator stays at the same low level (double bottom). This suggests selling momentum is steady but not accelerating. The chart shows no immediate change in momentum after the divergence, so this signal is less reliable.
Hidden Bullish Divergence
Hidden divergence forms during an uptrend: price makes a higher low while the oscillator makes a lower low. This implies that despite waning momentum, buying pressure remains strong enough to push price higher. It signals trend continuation rather than reversal. Divergence can persist across multiple highs or lows over a long period.
Common Indicators for Divergence
Besides RSI, traders use the Commodity Channel Index (CCI), Stochastic, Williams %R, MACD, and On-Balance Volume (OBV). Combining multiple indicators can improve confidence. For example, after spotting hidden divergence with RSI, checking Stochastic and MACD for the same pattern increases validity. However, indicators sometimes contradict each other; in those cases, traders should apply other analysis methods like support/resistance and candlestick patterns.
Divergence is a reliable clue for potential price retracements, but it does not guarantee a full trend reversal or provide a price target. Signals can persist for a long time, so always confirm with additional tools before acting.