What is Divergence? Divergence indicates to us that a trend is losing momentum and could be ready for a reversal or a deeper correction soon. When we see divergence, we should be cautious when trading in the direction of the trend and look for countertrend/reversal trades.
How to identify Divergence? When price is making lower lows, MACD (or RSI ) will show higher highs = Divergence. (Vice Versa)
We can see that we have divergence on the bigger bearish wave indicating that there's a reversal coming soon. We also have divergence on the current 5th bearish leg, also indicating that there's a reversal coming soon.
We are currently on the last legs of this bearish wave. Looking for one more correction for a move lower before we start the next bullrun.
Trade Idea: - Watch for a correction for subwave iv - Enter on break of correction with stops above that recent high - Target: 1200, 1100
Please note that the above trade setup is a short trade. The bigger trade will be the reversal trade. Will update this chart when its ready!
Are we ignoring the giant head and shoulders that one last drop in your chart causes? It breaks the neckline, and would probably consolidate a little close to the neckline, and if broken, I don’t see it bouncing to the upside. It’s possible tho. I never discount any possibility.
It was a good way of explaining divergence tho. I like using the RSI as a divergence indicar as well especially for smaller time frames, as macd is a farther lagging indicator. Lower lows on chart but not RSI = bullish divergence.
Also if RSI goes under 30 and the next wave down can not make a lower low on RSI it’s a swing exception/ another form of divergence and a great reversal signal.
Gunslinger2005
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@BrianVS, head and shoulders patterns do not make the world turn.