thE hAnDbook of tEchnicAL AnALySiS
9.1 Definition of Divergence
Generally speaking, divergence occurs when two data or time series exhibit mo-
tion in opposing directions. But as will be shown shortly, this is not always the
case.
9.1.1 Main and supporting Data series
When trying to determine if divergence exists, we compare the main data series to
its supporting data series. The main data series may have one or more supporting
data series. In technical analysis, the main data series is usually price itself while
the supporting data series comprises various oscillators and indicators.
Nevertheless, both the main and supporting data series may be comprised of
any of the following, and are by no means limited to the following list:
■ Price
■ Oscillators
■ Overlay indicators
■ Volume
■ Open interest
■ Market breadth indicators
■ Sentiment indicators
■ Relative strength chart
In order to accurately and sensibly defi ne divergence and convergence, we
must fi rst clarify what is meant by opposing directions.
9.1.2 Defi ning Direction in Divergence analysis
Motion can only take place in three possible directions, namely up , down, or
sideways. Some practitioners contend that sideways motion does not constitute a
true trend. Nevertheless, for the purpose of defi ning divergence, this contention
does not invalidate or detract from the analysis.
nOte
Moving in opposing directions is defi ned as one data series moving in two
out of three possible directions while the other data series is moving in the
remaining direction.
This gives rise to six possible combinations for moving in opposing directions:
- One data series is up while the other is sideways
- One data series is up while the other is down
- One data series is sideways while the other is up
- One data series is sideways while the other is down
