Divergence Technical Analysis in Stocks

Divergence technical analysis set-up is one of the stocks signals that can be generated when using the divergence technical analysis stochastic oscillator.

Divergence on stochastic indicator is a signal that a rally or retracement is losing steam & is likely to reverse. It means that the last buyers or last sellers are pushing the stocks price in one way while the majority of other stocks traders have stopped trading in that way & are cautious of a stocks price correction or retracement.

There are four types of divergence setups that can be traded using this divergence technical analysis.

Example 1: Stock Classic Bullish Divergence

A Bullish Divergence in the stochastic technical indicator and the stocks price is followed by a rise in stocks price.

stochastic divergence technical analysis

When the stocks price is making new lows the stochastic divergence technical analysis is not moving past its previous lows it is an indication that the down stocks trend is about to reverse & a bullish rally is likely to occur.

In the stocks example above stochastic divergence technical analysis setup the stocks price set a new low but it was not coupled with a new low in the measure of Stochastic oscillator, when price formed a new low then the indicator should have followed suit, but the stochastic indicator did not therefore the stochastic divergence technical analysis setup.

This stochastic divergence technical analysis setup is even stronger because there is combination of a divergence and then followed by a rise above the 20% level. This combines the Over-bought & Oversold levels.

Example 2: Stocks Classic Bearish Divergence

A Bearish Divergence in the stochastic technical indicator and the stocks price is followed by a drop in stocks price.

stochastic divergence technical analysis

When stocks price is making new highs but the stochastic divergence technical analysis is not moving beyond its previous high it is an indication the up stocks trend will reverse & that a bearish divergence will follow.

This stochastic divergence technical analysis set up is even stronger because there is a combination of a divergence trading signal with a dip below the over bought 80 level.

Example 3: Stock Hidden Bullish Divergence

This stochastic divergence technical analysis setup signifies a retracement in an upwards trend. This is the best type of divergence to trade, because you're not trading a stocks price trend reversal, but you are trading within the direction of the Stocks Trading market trend.

stochastic indicator divergence technical analysis

Even though, the stochastic oscillator in this stochastic divergence technical analysis setup made a lower low the stocks price low was higher than the previous low (higher low). This means that even though the sellers made a good attempt to push stocks price down as indicated by the stochastic divergence technical analysis, this was not reflected on the stocks price, and the stocks price did not make a new low. This is the best place to buy the stocks instrument, since it is even in an upward stocks trend there is no need to wait for a confirmation trading signal, because you are buying in an upward stock trend.

Example 4: Stock Hidden Bearish Divergence

This setup signifies a retracement in a downwards trend.

stochastic indicator divergence technical analysis

This is the best type of divergence to trade with this stochastic divergence technical analysis setup, because you are not trading a stocks price trend reversal, but you are trading within the direction of the trend. This is the best place to sell the stocks instrument, since it's even in a down stocks trend there is no need to wait for a confirmation trading signal, because you are selling in a downwards trend.