thE hAnDbook of tEchnicAL AnALySiS
9.7 Chapter Summary
As we have seen, divergence may be observed in a variety of technical setups. It is
always best to obtain price confirmation when using divergence. This is because in
some cases, the indicators will remain in a state of persistent divergence with price
or another data series, such as in the case of serial or multiple divergences. The use
of weakly or non‐correlated data series will also help increase the probability of
a divergent signal being more reliable, circumventing the adverse and misleading
effects of multicollinearity.
One aspect not discussed in this chapter is that of divergence between implied
and historical volatility. Option traders are particularly interested in observing di-
vergence between implied and historical volatility as a guide for gauging the most
appropriate options strategy to employ. When the level of implied volatility is sig-
nificantly overbought with respect to itself and also higher than the corresponding
historical volatility, a reversion to the mean is usually expected in the form of a
potential volatility crush.
Finally, practitioners interested in using divergence as a tool for price projec-
tions may also want to refer to Constance Brown’s book Technical Analysis for
Figure 9.111 Forecasting Reversals in the S&P500 via Market Breadth Divergence.
Courtesy of Stockcharts.com
