Divergence Analysis
setup at a lower wave degree. The penetration of a higher peak or lower trough
may be used as a price barrier for price confirmation. Alternatively, a moving
average may also be employed to catch the reversal at the lower wave degree.
Figure 9.88 shows price motion at a higher wave degree originating from oscil-
lations at a lower wave degree. We see the same area of conflicting signals as in
Figure 9.87. After establishing reverse bullish divergence at the higher wave de-
gree, the trader may initiate a long entry at point A upon the breach of the first,
second, or even third higher peak at the lower wave degree, depending on the
parameters of the entry filter employed. Alternatively, an upside violation of a
downtrend line or moving average based on the lower wave degree may also be
used as an entry trigger. Similarly, a trader may use the breach of a lower trough
to initiate short entry at point B after establishing standard bearish divergence at
a higher wave degree, with the downside violation of the uptrend line or moving
average based on the lower wave degree as alternate entry triggers.
As long as price confirmation is not wholly dependent on resistance or sup-
port levels based on the prior peak or trough at the higher wave degree, then
signal conflicts will, in most cases, not adversely impact participatory action. For
example, in Figure 9.89, a reverse bullish divergent signal overlaps a reverse bear-
ish divergent signal. We observe that the reverse bullish divergent setup failed to
gain confirmation at the prior resistance level based on the peak at point 3. The
reverse bearish divergent setup also failed to gain confirmation at the prior sup-
port level based on the trough at point 2. Therefore, seeking price confirmation at
the next lower wave degree is preferable in most cases.Figure 9.87 Conflicting Signal Overlap in Opposing Divergent Setups.