Divergence Analysis
- Reverse Bullish Divergence also occurs when only price, and not the sup-
porting data series, is making equal or higher troughs. But in this case, price
is expected to continue to make higher peaks and troughs, establishing the
subsequent uptrend at the next higher wave degree. This type of divergence
may also be likened to a failed Bear Setup. The underlying rationale for bull-
ishness is as follows: although falling troughs in the supporting data series in-
dicate diminishing momentum, price still fails to penetrate below its previous
trough, which is potentially bullish for price. As in all reverse divergences,
price moves in opposition to the direction indicated by the supporting data
series at non‐confirmation. See Figure 9.41.
In Figure 9.42, we observe that there is a reverse bullish divergent setup
between points A and B, as well as on a higher wave degree between points
B and C. This double divergence on Pfizer Inc. is regarded as more bullish
than if it is accompanied by simple divergence. We see agreement between
the MACD and Chaikin Money Flow (CMF) oscillators. This is a much better
combination of oscillators than that observed in Figure 9.37, as the degree of
collinearity between the MACD and CMF is significantly less. This is largely
because the CMF oscillator takes into account volume information, and not
just that of price alone. The current larger trend is expected to continue to
the upside, with further price excursion being potentially precipitated by a
penetration of either the prior resistance or 20‐day simple moving average,
indicated by price confirmation points 1 and 2, respectively. Traders will nor-
mally attempt to trade the breakout around the prior resistance and moving
average. Further bullish signals prior to breakout include the CMF turning
positive and the MACD signaling a bullish crossover with its signal line.
This dual interpretation of reverse divergence is summarized in illustrations
(4), (7), (8), (11), (12), and (15), in Figures 9.43 and 9.44.Figure 9.41 Reverse Bullish Divergence.