ChAPter 9 Divergence Analysis
L e a r n i n g O b j eCt i v e sUpon completing this chapter, you should be able to:■ Understand the narrow and the broader meanings and interpretation of divergence and
convergence
■ Employ the concept of confirmation to categorize divergence
■ Differentiate between standard, reverse, bullish, and bearish divergence
■ Recognize and forecast divergent signal alternation between standard and reverse
divergence
■ Distinguish between George Lane’s Setups and contemporary reverse divergence
■ Appreciate the directional implications of divergence in terms of wave degrees, cycles,
and trend referencing
■ Apply divergence analysis to the market via an integrated approachD
ivergence, when used in conjunction with other indicators, offers one of the
most effective ways of forecasting potential reversals and continuations in
price and market action. It may be derived from a variety of sources and tech-
nical data. Divergence can also be found on all wave degrees and timeframes.
It is particularly useful when identified between non‐correlated data series.
One of the earliest and possibly the most significant application of divergence
can be found in development of Dow Theory, where divergence between the
Dow Industrials and Transportation Averages is commonly regarded as an im-
portant barometer of potential future market action. We will also attempt to
bring some definitional clarity and coherence to terms such as standard and
reverse divergence, direction, confirmation, continuation, and reversals with
respect to divergence analysis.