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A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis by Mark Andrew Lim

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CHAPTER 9

Divergence Analysis

LEARNING OBJECTIVES

Upon completing this chapter, the practitioner or student should be able to:

  • Understand the narrow and the broader meaning and interpretation of divergence and convergence
  • Employ the concept of confirmation to categorize divergence
  • Differentiate between standard, reverse, bullish, and bearish divergence
  • Recognize and forecast divergent signal alternation between standard and reverse divergence
  • Distinguish between George Lane's Setups and contemporary reverse divergence
  • Appreciate the directional implications of divergence in terms of wave degrees, cycles, and trend referencing
  • Apply divergence analysis to the market via an integrated approach

Divergence, when used in conjunction with other indicators, offers one of the most effective ways of forecasting potential reversals and continuations in price and market action. It may be derived from a variety of sources and technical data. Divergence can also be found on all wave degrees and timeframes. It is particularly useful when identified between non-correlated data series. One of the earliest and possibly the most significant applications of divergence can be found in development of Dow Theory, where divergence between the Dow Industrials and Transportation Average is commonly regarded as an important barometer of potential future market action. We will also attempt to bring some definitional clarity and coherence to terms like standard and reverse divergence, direction, confirmation, ...

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