Divergence Analysis
a Bull or Bear setup actually fail? Though it may be somewhat difficult to resolve
this conceptually, on the practical side, the trader could easily employ a bidirec-
tional approach such as initiating a straddle breakout around the price level where
a reversal is expected in a Bull/Bear setup. Should the reversal entry fail, the trader
would subsequently re‐enter in the opposite direction, expecting further continu-
ation. Of course, the only downside in any bidirectional entry mechanism is the
unfavorable buildup of oscillational losses across the straddle.
So in summary, the overbought/oversold rationale is probably the best expla-
nation for price continuation during reverse divergence. The momentum principle
only works to explain standard divergence, but cannot account in any way what-
soever for reverse divergence, while the chronological and contrarian approache
works well to explain reverse divergence. This unfortunately begs the question of
why we should not apply the chronological or contrarian approach to standard
divergence as well. Maybe the real answer lies in the level of popularity of certain
approaches. Applications of technical analysis evolve over time and if there is suf-
ficient interest in a particular approach or technique, it may ignite a self-fulfilling
prophecy whereby traders and investors start to trade in accordance with the
new interpretation, influencing market and price action. Furthermore, for every
interpretation, there will exist an equal and opposite proposition. Therefore, only
through continuous market observation and constant forward testing will it be
possible to determine the most reliable approach in the market.9.3.7 Double Divergence
Divergence can be simple, double, or even complex. There are numerous representa-
tions of double divergence. Generally speaking, double divergence is considered stron-
ger evidence for a potential reversal or continuance of the current trend. Let us now
examine a few different representations of double divergence. What follows are four
basic classifications of double divergence and these are by no means exhaustive.9.3.7.1 Contiguous peak to peak and trough to trough Divergence This
type of double divergence is characterized by having two contiguous or successive
divergent setups that are of the same type. Some practitioners refer to three or more
such successive divergent setups as multiple divergence. See Figure 9.56.9.3.7.2 inter peak or trough Double Divergence This type of double diver-
gence is characterized by having one divergent setup contained within a larger
divergent setup where both divergences are of the same kind, which therefore
reinforces its bullish or bearish signal. This type of double divergence is not com-
monly found in the markets. Figures 9.57 to 9.60 illustrate the four double diver-
gence setups. In all the following illustrations, point C is the focal or pivot point
of both the smaller and larger divergent setups. Figures 9.59 and 9.60 may also
refer to Bear and Bull setups, respectively.9.3.7.3 inter Wave Cycle/Degree Divergence This type of double divergence
is characterized by having one of two divergent setups formed at a higher wave