Divergence Analysis
Figure 9.105 is yet another example of using extreme Bollinger bandwidth
divergence to forecast potential reversals in price. The Bollinger bandwidth is set
to a lower lookback value of five days in order to increase its responsiveness to
rapid price excursions and market shocks. We see two selling climaxes occurring
at points 1 and 2, both of which were accompanied by large volatility spikes in
the Bollinger bandwidth. This first spike demarcates the historical volatility level
which will later serve as a threshold for potential future reversals. We see this vol-
atility threshold being subsequently violated, with Silver forming a new bottom
at point 2. The peaks of the volatility spikes lie well above its noise floor, indicat-
ing that the two bottoms are high sigma events. The noise floor is also fairly well
contained, fluctuating within a 15 percent band.9.6.3.3 examples of inter regression Line Divergence Some practitioners
also employ the use of a regression line to determine the direction of a particular
trend of interest. When using regression lines, slope analysis is employed, with all
non‐confirmation being either standard bullish or bearish divergence. As a result,
reverse divergence is excluded from the analysis when employing regression lines
to determine direction.9.6.4 examples of price to volume and Open
interest Divergence
In Figure 9.106, we see significant long‐term bearish divergence in Silver between
price and open interest, between time lines A and B. The volume action displays
bullish confirmation and eventually peaks at point 1. As pointed out in section
9.4.14, any extremely bullish formation is potentially bearish, and vice versa. WeFigure 9.105 Forecasting Reversals in Silver with Bollinger Bandwidth Divergence.
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