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axis. This powerful concept defines relationships between price and all other aspects of the charting
landscape. Indicators that trend in a different direction than price signal divergence. They converge
when their movement corresponds with price direction. Divergent conditions mark negative
feedback, while convergence aligns with positive feedback. One market can also converge or
diverge with another. When S&P 500 goes up and Nasdaq 100 goes down, the two indices diverge.
Bonds and index futures converge when they both rise.
Swing traders must decide which forces will prevail as divergent conditions resolve. For example,
when falling price bars move against a rising MA, one will eventually rotate to track the other.
Common technical wisdom dictates that indi cators define an underlying trend more accurately than
price over short periods of time. But this logic often fails and wayward indicators obediently turn to
confirm the price action.
Apply a logical strategy to evaluate divergence and avoid very bad executions. Start with a
recognition that every market will exhibit numerous C-D relationships. Limit detailed analysis to
those elements that will support or interfere with the planned setup within the chosen holding
period. Locate the major C-D themes and filter out the smaller ones. Some divergences tend to
resolve more quickly than others. Accumulation can lag price for a long time before stopping a
rally. But a declining moving average could have a dramatic effect on price as a short-term rally
strikes it.
FIGURE :
Oscillators pick up market turns faster than trend-following indicators. Notice how the Stochastics swings quickly in
response to each Cisco reversal while the slower MACD Histogram responds incrementally to each price bar. Use
oscillators in choppy markets but switch to trend-following measurements during sharp breakouts and breakdowns.
Apply cross-verification techniques to C-D trade analysis. Look for many discontinuous forms of
convergence that support the promising pattern. Compare these with the elements that diverge to
reach a logical conclusion about the next price direction. When convergence aligns repeatedly
through a single price point, odds increase dramatically that an important breakout or reversal will
occur right there. Couple this knowledge with well-marked S/R information and execute with
confidence. S/R exerts a greater influence on price development than C-D. When a market builds a
bullish pattern in the face of declining indicators, subsequent price action will more likely confirm
the pattern than the divergent mathematics.
Identify other conditions that support or conflict with current price development before making the
trade. Determine how seasonality or time-of-day bias affects the odds for the predicted move.
Consider the limitations of the indicator or landscape feature that exhibits the divergence.
Oscillators in trending markets and trend-following indicators in flat markets both trigger many
false signals. When in doubt, step to the sidelines and wait for a better opportunity. The most
profitable trades will exhibit major convergence between many chart elements.
