Divergences

The main analysis element of indicators, though often underestimated, lies in the divergences principle. This corresponds to a disconnection between the prices evolution and that of the indicator (cf. graph). One will thus consider a downward (upward) divergence when the oscillator is following a downward (upward) trend while prices are still rising (falling).

This phenomenon is directly linked to the derived function status of indicators. Indeed, a decrease of the indicator while prices are rising indicates that this rise is pursuing at a lower pace. This breathlessness of the market then lets expect a reversal on the downside. Still, this approach is valid only when linked to the preceding aspect, i.e. the presence of the oscillator in an oversold or overbought area. Indeed, these zones are the predilection place for trend reversals, as they mark an uninterrupted trend. In comparison, a neutrality (cf. graph) of markets makes breathlessness quite unlikely and thus little relevance to the analysis of divergences. Moreover, as divergences are premonitory signs, it is often careless to act in consequence just after the apparition of divergences. It is then much safer to check whether they are validated or not, i.e. if the indicator can rebound on the overbought or on the oversold line (cf. graph).