An oscillatorís failure to confirm the higher high or the lower
low of the market is a red flag to most technical traders. Is
there a message when the price diverges from the indicator?
This veteran technician thinks there is.
Technical analysts are constantly
comparing prices and indicators
to see whether they are moving in
gear or if there are discrepancies.
Itís when discrepancies appear
that an alert to a probable change
in trend is given. Most traders are
familiar with the concept of momentum
with price. For instance, as you can see in Figure 1, momen-tum
makes a series of declining peaks as the price works its
way higher. This indicates that the underlying momentum is
gradually dissipating, signaling that a peak in the price may be
at hand. The opposite set of conditions would be true for a
declining trend. The problem with divergences is that you never
know how many to expect prior to the actual trend reversal.