Understanding market momentum and spotting early signs of trend reversals are essential skills for any trader. One of the most powerful tools in a technical analyst’s toolkit is divergence—a phenomenon that occurs when the price of an asset moves in the opposite direction of a technical indicator, typically an oscillator like the Relative Strength Index (RSI), MACD, or Stochastic. This mismatch can signal weakening momentum and often precedes a reversal. In this guide, we’ll explore bullish and bearish divergence, their types, how to identify them, and how to use them effectively in trading strategies.
What Is Divergence?
Divergence occurs when the price of an asset and a technical indicator move in opposite directions. Normally, rising prices are confirmed by rising momentum indicators, and falling prices by declining indicators. When this relationship breaks down, it creates a divergence—a potential warning sign that the current trend is losing strength.
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There are two main categories: regular (classic) divergence, which signals potential reversals, and hidden divergence, which suggests trend continuation.
Core Keywords:
- Bullish divergence
- Bearish divergence
- RSI divergence
- MACD divergence
- Stochastic oscillator
- Trend reversal
- Hidden divergence
- Technical analysis
Types of Divergence: Class A, B, and C
Divergences are classified into three main types—A, B, and C—based on their strength and reliability.
Class A Divergence – Strong Signal
Bullish Class A: Price makes a lower low, but the indicator makes a higher low. This suggests downward momentum is fading and a reversal to the upside may be near.
Bearish Class A: Price makes a higher high, but the indicator forms a lower high. This indicates that upward momentum is weakening—an early sign of a potential downturn.
Class A divergences are the most reliable and widely watched by traders.
Class B Divergence – Moderate Signal
Bullish Class B: Price reaches the same low as before (double bottom), but the indicator forms a higher low. This suggests improving momentum despite price stability.
Bearish Class B: Price hits a similar high (double top), but the indicator shows a lower high—hinting at weakening bullish strength.
These are less reliable than Class A but still valuable when confirmed by other signals.
Class C Divergence – Weak Signal
Bullish Class C: Price makes a lower low, but the indicator reaches the same low—showing mixed signals.
Bearish Class C: Price makes a higher high, while the indicator hits the same high—again, indicating indecision.
Class C divergences are generally considered weak and should be used cautiously, ideally with additional confirmation.
Hidden Divergence: Trend Continuation Clues
Unlike regular divergence, hidden divergence occurs within an ongoing trend and signals that the trend is likely to continue after a pullback.
- Hidden Bullish Divergence: In an uptrend, price makes a higher low, but the indicator makes a lower low. This shows temporary weakness in momentum, yet the price structure remains strong—bullish continuation likely.
- Hidden Bearish Divergence: In a downtrend, price forms a lower high, but the indicator shows a higher high. Despite slowing momentum, the bearish structure holds—expect further downside.
Traders use hidden divergence to re-enter trends rather than reverse positions.
How to Spot Divergence Using Technical Indicators
Several momentum-based oscillators are commonly used to detect divergence:
- Relative Strength Index (RSI): Ideal for identifying overbought/oversold conditions and divergences.
- MACD (Moving Average Convergence Divergence): Useful for spotting shifts in momentum and trend strength.
- Stochastic Oscillator: Sensitive to price changes, excellent for early reversal signals.
- Williams %R: Another overbought/oversold tool that works well in ranging markets.
To spot divergence:
- Compare recent price highs/lows with corresponding indicator levels.
- Look for mismatches: e.g., price makes new high, but RSI does not.
- Confirm with volume, support/resistance levels, or candlestick patterns.
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Using Divergence in Trading Strategies
Divergence alone isn’t a trade signal—it’s a warning that momentum may be shifting. To turn it into actionable insight:
1. Combine with Chart Patterns
Divergence often coincides with key chart formations:
- Bullish divergence + Falling Wedge = Strong reversal signal
- Bearish divergence + Rising Wedge = High probability of downturn
- Double Top + Bearish RSI divergence = Confirmed resistance failure
2. Multi-Timeframe Confirmation
Check for divergence across timeframes:
- Daily bullish divergence supported by weekly RSI uptick increases reliability.
- Weekly bearish divergence aligns with monthly resistance = stronger sell signal.
3. Use Price Action for Entry & Exit
Since divergence doesn’t specify entry points:
- Enter after a breakout or breakdown from consolidation.
- Place stops below recent swing lows (for longs) or above swing highs (for shorts).
- Target previous support/resistance zones or Fibonacci extensions.
Real-World Examples
Example 1: Walt Disney (DIS) – Weekly MACD Bullish Divergence
On a weekly chart, Disney’s price continued making lower lows during a downtrend. However, the MACD began forming higher lows—indicating slowing downside momentum. This Class A bullish divergence coincided with a Falling Wedge pattern. Soon after, price broke upward, confirming a new bullish trend.
Example 2: Accenture (ACN) – RSI Bearish and Bullish Divergence
In the first phase, ACN’s price made higher highs while RSI formed lower highs—bearish divergence signaling an impending drop. After the decline began, another divergence emerged: price made lower lows, but RSI formed higher lows—bullish divergence suggesting exhaustion. Price eventually reversed into a new uptrend after retesting prior lows.
Frequently Asked Questions (FAQ)
Q: Is bullish divergence always followed by an upward move?
A: No—divergence is a warning, not a guarantee. It must be confirmed by price action or other indicators before acting.
Q: Which indicator works best for detecting divergence?
A: RSI and MACD are most popular due to their clarity and widespread use. Stochastic works well in sideways markets.
Q: Can divergence occur on any timeframe?
A: Yes—divergence appears on all timeframes, but signals on daily and weekly charts tend to be more reliable than intraday ones.
Q: How do I avoid false divergence signals?
A: Use multiple confirmations—such as volume spikes, candlestick reversals (e.g., hammer, engulfing), or key support/resistance breaks.
Q: What’s the difference between regular and hidden divergence?
A: Regular divergence warns of trend reversals; hidden divergence suggests trend continuation after a pullback.
Q: Should I trade divergence in isolation?
A: Not recommended. Always combine with other technical tools for higher accuracy and risk management.
Final Thoughts
Bullish and bearish divergences are among the most insightful tools in technical analysis. They provide early warnings about momentum shifts—often before price reflects the change. By understanding the different classes and combining them with chart patterns, multi-timeframe analysis, and confirmation signals, traders can improve timing and decision-making.
Whether you're analyzing stocks, ETFs, or digital assets, learning to spot and interpret divergence can significantly enhance your edge in the market.
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