We have been using the MACD Histogram to illustrate divergences because they show very clearly where the divergence occurs. But that isn't the only indicator we can use. Divergences happen in almost every indicator, even volume. Yes, volume is an indicator. A very important one.

Below is a chart where volume is droping although the price continues to rise, a bearish divergence. This shows there are no new buyers supporting the trend. Volume is the steam of the price engine. No steam no continuation of the trend. As you recall we had a pullback after the 8th of November. The right side of the chart shows the trend weakening.

Another common divergence is in the PPO lines. The histogram divergences are quite common and can be long in duration. The ppo line divergences are stronger evidence of impending turn around. You should keep your eye out for these.

My favorite divergence indicator is on the RSI. The Relative Strength Indicator shows the relative strength of the stock now to its self in the past. Therefore if RSI is making a lower high while price continues up it is a strong sign the underlying trend is weakening.

Below is a chart of the Russell 2000. You'll see the bearish divergence marked clear as day on the RSI. This is before the January pullback. You'll also see the ppo lines in a bearish divergence. Notice if you had gotten out of your trade on the day the RUT made a higher high and the RSI failed to break above 70 you would have missed the pullback.

Another indicator you could watch is the WM%r. It also measures momentum of the move. Therefore if the WM%r is diverging then the underlying trend is changing. In the AMZN chart below you'll see the WM%r picked up a bullish divergence where the RSI did not. The RSI  picked up a bearish divergence where the WM%r did not. Hence the reason so many people use several indicators. Also note that the RSI Bearish divergence is accompanied by a double top.

Well this pretty much concludes our discussion on Bullish and Bearish divergences. Remember a bullish divergence takes place in a downtrend. As price is making a lower low your indicator/s is making a higher low. A bearish divergence takes place in an uptrend. As price is making higher highs your indicator/s is making a lower high. Divergences can take place on many indicators. Look for them on your favorite indicators.

I hope this blog has helped you put one more tool in your toolkit when reading charts. I look forward to continuing next week with a discussion on the RSI. One of my favorite indicators with which to play.

I'd like to thank the following people who have helped me considerably:
Wendy Kirkland
Dr. Alexander Elder
John Murphy
Stockcharts.com  for providing the screenshots