Intermediate3 min readTechnical Indicators · 14/16
Divergence Between Price and an Indicator
Usually, when price makes a new higher peak, an indicator such as RSI makes a higher peak too. Sometimes that does not happen: price goes higher while the indicator goes lower. That mismatch is called divergence, and it describes something specific about the move.
What you will learn
Recognize negative and positive divergence on a chart and in numbers.
Understand what divergence says about the momentum of a move.
See why divergence can persist without price changing direction.
The lesson as a short video · 20 seconds · Watch on YouTubeIn this lesson
Divergence is when price and an indicator move in different directions at their peaks or troughs. The two best-known kinds:
Negative (bearish) divergencePrice makes a higher peak than the previous one while the indicator makes a lower peak.
Positive (bullish) divergencePrice makes a lower trough than the previous one while the indicator makes a higher trough.
Price: a higher peak
12.0012.60
RSI: a lower peak
7869
Negative divergence: price reached a higher peak while RSI made a lower one.
What does it describe exactly?
Worked exampleAn invented stock peaked at 12.00 with RSI at 78. A few weeks later it made a higher peak at 12.60, 5% higher. But RSI at the second peak was only 69. The description: price reached a higher level, but the upward momentum RSI measures was weaker, so the indicator did not confirm the new peak. Gains in the recent sessions did not dominate losses as strongly.
So negative divergence describes a new price peak the indicator did not confirm: the upward momentum it measures is weaker, not that the rise has ended. Positive divergence describes a new trough the indicator did not confirm: the downward momentum is weaker, not that the decline has ended. That difference matters.
The limits of divergence
Divergence can persist for a long time. Price can make a third and fourth higher peak while the indicator keeps making lower ones, all within an ongoing uptrend. And choosing the peaks involves personal judgement: which two peaks do you compare? A different choice can give a different picture.
Watch outDivergence is neither timing nor a buy or sell signal. It is an observation that the indicator did not confirm the new peak or trough, and price can carry on in the same direction afterwards.
Look for divergence yourself
Open any stock chart on FoudaLens, add the RSI pane, and compare the last two price peaks with the matching peaks in RSI.