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Stocks & Commodities V. 19:3 (30-36): Momentum And Divergence by Martin J. Pring
BASIC TECHNIQUES

Why Do Divergences Need To Be Confirmed By Price?

Momentum And Divergence

Trading momentum requires several levels of perception. C
B
Take a look at its divergence with price. FIGURE 1: LEADING
INDICATOR. Since
A
momentum looks at
price differences, it’s
by Martin J. Pring A Negative divergence possible for it to lead
B actual price action.
C
t is a fact that the term momentum
is a generic one encompassing all

I oscillators. It is also a fact that

there are many interpretive
principles, most of which are
common to all momentum series
in one way or another.
Divergence from price action is
a key principle.
When using momentum with
A FIGURE 2: BOTTOM
the overbought/oversold concept, I assumed that the price and DIVERGENCE. Though
momentum peaked and troughed more or less simultaneously. B
momentum divergence is
That is not often the case. Equally likely is the possibility that C more common at tops
the oscillator will turn ahead of the price. In this instance, the than at bottoms, it can
happen at the lows.
momentum indicator graphically measures the acceleration or B C
A
deceleration of a price move.
In Figure 1, the momentum series peaks at point A, but the
price does not peak until C. This conflict between momentum
and price is known as a divergence. The example in Figure 1
is referred to as a negative divergence because rising prices
are supported by progressively weakening underlying Negative Confirmation
FIGURE 3: CONFIR- divergence
momentum. As in most things in life, it takes much longer to MATION. Momentum
build something than to tear it down, and markets are no divergence must be
exception. I find that momentum divergences at market peaks confirmed by price ac-
are far more plentiful and the lead times generally greater tion and/or a change in
a trend indicator.
than at market bottoms.

FIGURE 4: CONFIRMATION. FIGURE 5: NONCON-

When prices break through the FIRMATION. Divergence
shoulder, the divergence with can occur without confirm-
momentum is confirmed. ing price action.

No confirmation
S S Negative divergence
H Confirmation

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 19:3 (30-36): Momentum And Divergence by Martin J. Pring

Even so, divergences do occur at

market bottoms, where they are
referred to as positive divergences.
Figure 2 shows an example. You
can see that the price made its low at
point C, whereas the oscillator made
its bottom at point A. In this example,
the oscillator is said to be walking
uphill.

How do you know this

is the last divergence?
You don’t, of course.
Two divergences could
be followed by a third
or even a fourth.
NOTA BENE
Although they indicate a
deteriorating or improving market
condition, divergences in and of
themselves do not signal that the
prevailing trend has reversed. That
can only come from some kind of
trend reversal signal generated by
the price itself. This could take the
form of a price pattern completion
or a moving average crossover, as
well as other signals. In this sense,
technicians say the divergence has
been confirmed by the price.
In Figure 3, the series of negative
divergences is eventually confirmed
by the price breaking a down
trendline. Figure 4 demonstrates a
similar activity, but in that case,
the trend is from down to up, and
the confirmation comes from a price
pattern completion.
Why does a divergence need to be
confirmed by price? It’s simple. Just
ask yourself: How do I know this is
CHRISTINE MORRISON

the last divergence? You don’t, of

course. Two divergences could be
followed by a third or even a fourth.
For example, Figure 5 shows the
existence of several divergences,
yet they are quickly cleared up and the price never reversed. know for sure that it is going to rain until you can feel the
Had I waited for the trendline to be violated, there would never raindrops on your hand. The test for rain in this case is
have been a reason to sell; yet, had I acted on any of the analogous to confirmation by the price.
divergences, the sale would have been premature.
I always equate the concept of negative divergences with a SIGNIFICANCE OF A DIVERGENCE
person looking up at the sky as he or she is leaving the house. Three basic tests help determine the significance of a divergence.
The clouds are black and it looks like rain. However, you never These are the number of divergences, the time separating them,

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 19:3 (30-36): Momentum And Divergence by Martin J. Pring
Kellogg
3-month rally
14-day RSI
FIGURE 6: BREAK. Divergence may work as it did here, but not always. See Figure 7.
and the closeness of the momentum reading to the equilibrium
level at the final turning point in price.
In general terms, the greater the number of divergences, the
greater the significance. In the case of a market top, a large
number of negative divergences indicates a trend that is
undergoing a long and serious weakening process. Think of
our rain cloud example; generally speaking, the blacker the
clouds, the more rain you would expect to fall. In markets, the
greater the number of negative divergences, the stronger the
trend change, once it has been confirmed by the price.
The same principles apply to market bottoms. The more
plentiful the number of divergences, the stronger the underlying
technical position. It is not the case that every time you see
multiple divergences, the change in trend will be more striking
than when you can only spot two, because words such as
certain or always cannot be used in technical analysis. What I
can say is that the probabilities favor a stronger trend change
with the greater the number of divergences.
The length of time separating the divergences is important
because it reflects the type of trend being monitored. For
example, if you are a trader analyzing short-term price swings,
Confirmation
Virtually
no upside
momentum
at final peak
FIGURE 8: DISAPPEARING MOMENTUM. The best momentum
divergence is one that ends close to the equilibrium level of
momentum — there is virtually no momentum left.
Copyright (c) Technical Analysis Inc.
CRB Spot Raw Industrials
13-week ROC
FIGURE 7: NO BREAK. A divergence in 1993 works but one from 1995–97 doesn’t.
Divergence alerts you to potential action; price action confirms it.
you would expect the divergences to take place over a week or
so. On the other hand, if you are an investor, you would be more
concerned with intermediate (six-week to nine-month) or
primary (nine-month to two-year) trends. Here, the oscillators
would be constructed with longer-term time frames and
separated by a much longer period.
Figures 6 and 7 offer some examples. In Figure 6, Kellogg
experiences a small divergence with the 14-day relative strength
index (RSI). When confirmed by a trend-break in the price, a
three-month rally follows. On the other hand, Figure 7 features
a divergence (1995–97) between CRB and a 13-week ROC. It
could be argued that this is not a strict divergence, because the
final low is at around the same level as its two predecessors.
However, the effect is the same, since the ROC continues to
walk downhill as the price fails to make any upside progress.
LEVEL
Finally, the level at which the last divergence takes place is
important. As a general rule, the closer to the equilibrium level,
the greater the significance. Rallies in a momentum indicator
barely able to support an oscillator reading above the equilibrium
FIGURE 9: DOWNSIDE MOMEN-
TUM. Just as a break as momentum
fades on the upside is generally valid,
so too is a break as momentum fades
on the downside.
Virtually no downside Confirmation
momentum at final low
 Stocks & Commodities V. 19:3 (30-36): Momentum And Divergence by Martin J. Pring
Confirmation
General Motors
Virtually
no upside momentum
30-day ROC at final peak
FIGURE 10: GENERAL MOTORS. As price leveled on GM and momentum faded back to the
zero line, the situation set up for a sharp break.
are often followed by a sharp decline (Figure 8).
The same principle in reverse develops at market bottoms
(Figure 9). This is one of the few instances in technical analysis
when a clue appears, hinting at the next price move. Once again,
I must stress that there is no such word as certain in technical
analysis. However, if you are able to spot when weak momentum
at a final turning point is confirmed by the price, then you must
be on your guard for a larger than normal price movement.
EXAMPLES
Figures 10 and 11 present some interesting examples in the
marketplace. First, Figure 10 shows a top in General Motors,
where the rate of change was barely able to rally above zero at
the time of the final peak. A sharp decline followed the
confirmation as the price broke below the trendline.
Figure 11 shows a similar situation, but this time during a
trading range. The final low in the price was around the same
level as its predecessors, but the corresponding momentum low
was close to zero. Even though this was not a true divergence in
Copyright (c) Technical Analysis Inc.
IBM
Confirmation
Virtually
no downside momentum
at third low
30-day ROC
FIGURE 11: IBM. Figure 11 shows a similar situation as in Figure 10, but this time during a
trading range. The final low in the price was around the same level as its predecessors, but the
corresponding momentum low was close to zero.
the strictest sense, there can be no mistaking the lack of downside
momentum at this point and the subsequent sharp rally.
Martin J. Pring founded the International Institute for
Economic Research in 1981. He pioneered the introduction
of videos as an educational tool for technical analysis in
1987 and was the first to introduce educational interactive
CDs in this field.
RELATED READING
Pring, Martin J. [1998]. Introduction To Technical Analysis,
McGraw-Hill.
_____ [1993]. Martin Pring On Market Momentum,
International Institute for Economic Research.
_____ [2000]. Momentum Explained: Principles Of
Interpretation, International Institute for Economic
Research.
†See Traders’ Glossary for definition
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