Divergence Analysis
tip
Divergence must only be confi rmed by price alone, via the penetration of
some signifi cant price barrier.nOte
A divergent setup is seen as a bullish or bearish signal, while price confi rma-
tion is regarded as a trigger for participatory action.9.4 Price Confirmation in Divergence Analysis
Confi rmation and non‐confi rmation represents the potential for price to either re-
verse or continue at the current larger trend. In other words, it is merely evidence
that the market is either inherently weak or strong. We still require some form
of qualifying action in the main data series in order to prove or confi rm that the
divergent setup in the main data series is actually reversing or continuing with its
current larger trend as a result of that divergence.
This proof is referred to as price confi rmation and is normally based on the
penetration of some signifi cant price barrier in the main data series. Price confi r-
mation is never sought in the supporting data series. Divergence should only be
confi rmed by some form of qualifying price action and not on any indicator or
oscillator action. Once price has violated a signifi cant price barrier in the main
data series, we say that there is price confi rmation of the divergence setup. If price
does not prove itself by unfolding in the expected manner with respect to its larger
current trend, we say that the divergence setup is still unconfi rmed by price.Price confi rmation in the main data series is best determined by penetration
or violation of any signifi cantly clear and obvious price barriers, which include:■ Support or resistance levels
■ Indicator overlay barriers
■ Psychological levels (e.g., double‐ and triple‐zero‐digit prices)Some popular examples of indicator overlay barriers include trendlines, mov-
ing averages, chart patterns, fl oor trader’s pivot points, Ichimoku clouds, fi xed
percentage envelopes, volatility bands, Fibonacci based ratio levels, and Gann
levels. Conventionally, support and resistance, trendlines, and moving averages
are still the preferred price barriers for price confi rmation.The exact point of entry when initiating a long or short position based on
the level of price confi rmation depends on the entry fi lter employed, which may
include any of the following:■ Price‐based fi ltering
■ Time‐based fi ltering