The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Divergence Analysis

9.3 Standard and Reverse Divergence

With greater clarity on reversals, continuations, and the various approaches to

defining trend and direction, we are now ready to deal with the topic of standard

and reverse divergence.

Standard divergence is also referred to as classic, common, regular, or reversal

divergence, whereas reverse divergence is popularly referred to as hidden, inverted,

trend, or continuation divergence. George Lane used reverse divergence as part of

his Bull and Bear setups. Unfortunately, there is still a fair amount of definitional

confusion in technical analysis, especially when dealing with reverse divergence, as

there seems to be two distinct schools of thought on the matter. It is important to

remember that standard and reverse divergence are regarded as non‐directionally

aligned divergence and are interpreted under the broader definition. Standard and

reverse divergence refer specifically to non‐confirmation in the current larger trend.

When determining the nature and type of the divergence involved, we must

account for the:

■ (^) Wave degree at which the divergence is being observed or identified
■ (^) Approach used when applying reverse divergence
■ (^) Type of analysis used to determine divergence (i.e., slope, adjacent peak/trough,
or conventional peak and trough trend analysis)
In general terms, standard divergence occurs when:
■ (^) Only price, and not the supporting data series, is making equal or higher peaks
(based on adjacent peak to peak analysis).
■ (^) Only price, and not the supporting data series, is making equal or lower
troughs (based on adjacent trough to trough analysis).
■ (^) There is a non‐directionally aligned discrepancy between the slopes in price
and the supporting data series.
More specifically, standard divergence consists of any of the following 12
setups:

1. Price is making higher peaks while the oscillator is making lower peaks


2. Price is making higher peaks while the oscillator is making equal peaks


3. Price is making equal peaks while the oscillator is making lower peaks


4. Price is making lower troughs while the oscillator is making higher troughs


5. Price is making lower troughs while the oscillator is making equal troughs


6. Price is making equal troughs while the oscillator is making higher troughs


7. Price slope is rising while the oscillator slope is flat


8. Price slope is rising while the oscillator slope is falling


9. Price slope is flat while the oscillator slope is falling


10. Price slope is flat while the oscillator slope is rising


11. Price slope is falling while the oscillator slope is flat


12. Price slope is falling while the oscillator slope is rising