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Divergence Analysis

this reason that it is referred to as standard divergence. However, reverse diver-

gence involves comparing peaks in a falling market and troughs in a rising market

and may be somewhat counterintuitive.

9.3.3 Defining reverse bullish and bearish Divergence

The case for reverse divergence is not as straightforward, as there are two dis-

tinct approaches, one predicated on George Lane’s Bull and Bear setups and

a more contemporary approach that anticipates a contrary outcome. Reverse

divergence normally suggests a potential continuation of the current trend at

one higher wave degree, simply referred to as the current larger trend. In George

Lane’s Bull and Bear setups, this continuation is expected to be short lived as

price is expected to resume its original trend at the second higher wave degree.

Traders frequently employ reverse divergence to help identify tradable break-

outs, as well as tops or bottoms if employing Bull or Bear setups. The main dif-

ference between the two approaches is fairly easy to identify and may well serve

as a guide when in doubt:

1. The first approach requires a continuation of the current larger trend, with
   traders looking for an upside or downside breakout in price. For the sake of
   clarity and convenience, we shall refer to divergences associated with this con-
   temporary approach simply as Reverse Bullish or Reverse Bearish Divergence.
   Price moves in opposition to the direction indicated by the supporting data
   series at the point of non‐confirmation in the current larger trend.


2. The second approach also requires a similar initial continuation of the current
   larger trend, but this is expected to be eventually followed by a reversal, with
   traders usually looking to enter the market at tops or bottoms formed by this
   reversal. We shall henceforth use the same terms that George Lane originally
   attributed to this type of divergence, namely as Bull and Bear Setups. Price
   eventually follows in the direction indicated by the supporting data series at
   the point of non‐confirmation.

It is important to bear in mind that, when analyzing the market via slope di-

vergence, neither approach to reverse divergence applies anymore, and the setup

is interpreted using standard divergence. In short, reverse divergence only exists

when adjacent peak to peak or trough to trough analysis is used. Therefore, there

are no chart examples of reverse divergence based on conventional trend or slope

analysis.

Reverse divergence, in terms of bullish or bearish bias, may be reclassified into

four distinct categories, to accommodate both approaches, as follows:

1. Bull Setups occur when only price, and not the supporting data series, is mak-
   ing equal or lower peaks. Price is expected to initially reverse, making lower
   peaks and troughs until a bottom is formed, followed by a subsequent rever-
   sal to the upside, making higher peaks and troughs, representing an uptrend
   at the next higher wave degree. The rationale behind the bearishness is as