Knowing trend reversal through divergence
When the prices and oscillator go hand in hand with each other in the same direction this reflects the prevailing trend is intact but when prices and oscillator moves in the opposite direction hence it is the state of of being cautious and an alarm of trend reversal.
Negative Divergence
When the rising prices are supported by weaker & weaker underlying momentum. The deteriorating momentum represents an early warning sign of some underlying weakness in the price trend.Lead characteristics of momentum indicators are usually more pronounced at market peaks than troughs.Bearish divergences signify potential downtrends, when prices rally to a new high while the oscillator refuses to reach a new peak. In this situation, bulls are losing their grip on the market, prices are rising only as a result of inertia, and the bears are ready to take control again.
Positive Divergence
Divergence also occur at market bottom where they are called “Positive”, because momentum hits bottom before price does.When price lows are lower in a trend but momentum lows are higher. Bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low. This situation demonstrates that bears are losing power, and that bulls are ready to control the market again - often a bullish divergence marks the end of a downtrend.
The important fact is that divergences are meaningful if they occur in overbought or oversold zones. This because a signal of trend reversal is meaningless if there is no prior trend to reverse.
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