Divergence, also known as deviation, refers to a situation where a stock or index continuously makes new lows (or highs) during a downward or upward trend, while certain technical indicators fail to follow suit by making corresponding new lows (or highs).

During divergence, the upward or downward momentum slows down, and the stock price trend is likely to reverse. Bottom divergence occurs when the stock price or index is at a relatively low position, while top divergence indicates the opposite.

Forms of Divergence

1. Top Divergence (top divergence)

Top divergence suggests that the upward momentum is weakening, and the index or stock price may struggle to maintain its highs or even reverse downward. When this occurs, investors should consider selling early.

2. Bottom Divergence (bottom divergence)

Bottom divergence signals that the downward trend is nearing its end, and the index or stock price is beginning to bottom out and rebound. This is considered a buy signal.

Analyzing Divergence

Judging divergence based solely on price movement changes is difficult. Investors should use technical indicators (such as RSI, KDJ), trading volume, and open interest to assist in analysis.

Taking RSI (Relative Strength Index) as an example: if the stock price hits a new high, surpassing the previous peak, but the RSI is lower than its prior peak or even falls below the 50 neutral line, this confirms top divergence.

Similarly, using RSI: if the stock price drops below the previous low but the RSI does not follow and instead rises above its prior low, this indicates bottom divergence.

Divergence can appear in hourly charts, daily charts, or weekly charts. However, shorter timeframes (e.g., 15-minute or 5-minute charts) are more volatile and prone to false signals, while daily and weekly charts provide more reliable divergence signals.

Additionally, the more frequent the divergence occurrences, the higher the likelihood of a trend reversal. Generally, if divergence appears three or more times, the probability of a top or bottom formation is significantly higher.