Divergence Analysis
Figure 9.106 is a good example of this general rule in action. We observe a
signifi cant blow off in Silver during the 2011 rapid run up in price. The top in
Silver was accompanied by extreme volume and declining open interest, which we
see, in retrospect, as representing a potentially bearish setup.
Finally, as far as open interest is concerned, a declining open interest in a rising
market indicates diminishing volatility, which may adversely impact the persis-
tence of the current trend and is therefore deemed bearish. Similarly, a declining
ATR in a falling market also indicates diminishing volatility and by the same argu-
ment is deemed bullish.
From Figure 9.65 , it is clear that these indicators will signal divergence and
confi rmation irrespective of the direction of price. A decline in these indicators
always signals divergence, whereas a rise signals confi rmation. However, in order
to determine if the divergence and confi rmation are bullish or bearish, we need to
ascertain the current direction of price.
It is important to distinguish volume bar divergence with that of other volume
indicators and oscillators. Volume indicators like OBV, Chaikin Money Flow, Per-
centage Volume Oscillator, Accumulation Distribution Line (ADL), and Money
Flow Index (MFI) are all interpreted using conventional standard and reverse
divergence analysis, and are never interpreted in the same manner as volume bar,
open interest, and ATR divergence.Figure 9.65 Volume Bars, Open Interest, and ATR Divergence.nOte
The rules for interpreting volume bar divergence are completely different
from those for volume oscillator divergence.The disparity between volume bar divergence and other volume oscillator diver-
gences is obvious, especially during a pronounced selling climax. As volume surges
during a decline, refl ected by rising volume bars, volume oscillators tend to decline
instead. This is because volume oscillators are constructed to take into account price