thE hAnDbook of tEchnicAL AnALySiSIn general terms, basic reverse divergence occurs when:■ (^) Only price, and not the supporting data series, is making equal or lower peaks
(based on adjacent peak to peak analysis)
■ (^) Only price, and not the supporting data series, is making equal or higher
troughs (based on adjacent trough to trough analysis).
More specifically, basic reverse divergence consists of any of the following six
setups:
- The oscillator is making lower troughs while price is making higher troughs
- The oscillator is making lower troughs while price is making equal troughs
- The oscillator is making equal troughs while price is making higher troughs
- The oscillator is making higher peaks while price is making lower peaks
- The oscillator is making higher peaks while price is making equal peaks
- The oscillator is making equal peaks while price is making lower peaks
Remember that slope and reverse divergence are mutually exclusive and that
slope divergence is treated and interpreted in a similar manner to standard diver-
gence. There are six out of 18 possible combinations where successive peaks and
troughs between the two data series are pointing in the same direction, indicating
non‐divergence in the current larger trend. See Figure 9.27.
The remaining 12 consist of six combinations each, for standard and reverse
divergence, where the successive peaks and troughs between the two data se-
ries are pointing in different directions, as illustrated in Figures 9.28 and 9.29,
respectively.
9.3.1 bullish and bearish Divergence
Before delving any further, let us first turn our attention to the directional impli-
cations of divergence. Divergence may be categorized as either bullish or bearish,
sometimes also referred to as positive or negative, respectively.
Figure 9.27 Non‐Divergence at the Current Larger Trend Using Adjacent Peak to
Peak and Trough to Trough Analysis.