Divergence Analysis
Figure 9.48 Standard Bearish Divergence Leading to Reversal of the Current and Prior
Larger Trends.9.3.4 the Divergence Master heuristic
We can summarize the expected or potential follow-through action in the main
data series as follows:■ (^) If successive adjacent peaks in both the main and supporting data series are
pointing in different directions, we expect price in the main data series to be
bearish and subsequently fall in price, and
■ (^) If successive adjacent troughs in both the main and supporting data series are
pointing in different directions, we expect price in the main data series to be
bullish and subsequently rise in price.
This simple but powerful rule of thumb makes isolating and identifying bull-
ish and bearish divergences an almost effortless task. This heuristic is applicable to
both standard divergence and the contemporary approach to reverse divergence
analysis. However, keep in mind that this heuristic only applies to the initial stage
of a Bull and Bear Setup where a short‐term continuation of the current larger
trend is also expected before an eventual reversal.
9.3.5 standard and reverse Divergence as
Continuation and reversal at higher Wave Degrees
Continuation and reversal may exist at a certain wave degree but not at another.
As we have already seen, a reversal at one wave degree may represent continu-
ation at a higher wave degree, which in turn could easily represent a reversal at
an even higher wave degree. This leads us logically to the relationship between
divergent setups and various wave degrees. In the following illustrations, we shall
observe standard divergence leading to a reversal of the prior larger trend, while
reverse divergence is being followed by a continuation of the prior larger trend.
See Figures 9.48 to 9.51.