Divergence Analysis
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The use of peak to peak or trough to trough analysis to determine diver-
gence is only applicable if we are looking for non‐confi rmation between two
adjacent peaks or troughs at the current larger trend. Consequently, if we
are looking for divergence across multiple peaks and troughs, we must use
conventional trend or slope analysis instead.This has signifi cant implications in the determination of bullishness or bear-
ishness in divergence analysis, as we shall see in the following section.9.2.10 slope analysis and slope Divergence
Once it is determined that adjacent peak to peak or trough to trough analysis is
not applicable, the practitioner may then resort to conventional trend analysis.
When applying slope analysis, any disagreement between the slope in price and
its supporting data series shall be referred to as slope divergence. The term slope
divergence has also been employed by William Blau (in his book Momentum,
Direction and Divergence ) to refer to divergence between a moving average and
an oscillator. Though Blau uses the term in a more specifi c and proprietary fash-
ion, we will use it to refer to any divergence, under the broad interpretation, that
is identifi ed by comparing slopes between data series that are formed by either:■ Multiple peaks and troughs trending in opposing directions (Figure 9.7 )
■ Price excursions devoid of any visible peaks and troughs (Figure 9.8 )We see that there is an overlap between slope analysis and conventional trend anal-
ysis when multiple peaks and troughs are observed, but slope analysis distinguishes
itself from conventional when slopes are formed in the absence of peaks and troughs.
Assuming that the oscillator or indicator in the supporting data series represents
momentum, this would directly imply that a rising oscillator is potentially bullish
for price and a declining oscillator is conversely bearish. Alternatively, under the
narrow interpretation, this means that convergence between price and the oscillator
always implies potential price bullishness whereas divergence always implies poten-
tial price bearishness. We can therefore also refer to these, under the broad inter-
pretation, as bullish or bearish slope divergence. As seen in Section 9.1.3, there are
only six combinations of divergence under the broad interpretation, and three more
indicating non‐divergence. As will be discussed later, this interpretation of slope di-
vergence aligns perfectly with that of standard divergence analysis. Therefore, when
encountering slope divergence, we can interpret it in the same manner as that of
standard divergence in order to determine the bullish and bearish bias of any setup.
Hence, bullish slope divergence may be regarded as standard bullish divergence and
bearish slope divergence as standard bearish divergence.
In most situations, peaks and troughs are clearly visible on the charts, making
the identifi cation of bullish or bearish divergence a fairly simple task. However,
there may be occasions when the peaks and troughs are not obvious on a chart,