Rank price-oscillator divergences, then filter by trend

A labeled split, not an automatic trade

Divergence is a split between two series that usually travel together, turned into a labeled reversal hypothesis rather than an automatic trade.

After an advance, a new price high paired with a lower high on a companion indicator is classified as a negative divergence. Some procedures treat that label as a reason to reduce, exit, or reverse a long stance before price itself breaks down.

A new price low paired with a higher low on the companion indicator is labeled a positive divergence. Mismatch can be read between price and an oscillator, between two price series, or between two oscillators. Confirmation is the opposite of divergence: those series continue to print fresh extremes together.

The illustrated comparison line is a stochastic oscillator specified as 7(4),10 on daily bars. That oscillator is a range-based reading of where the close sits inside a lookback window, drawn against daily price structure.

Three classes of bearish mismatch

A three-class ranking treats a higher price high versus a lower oscillator high as the strongest bearish mismatch. That structure is orthodox bearish divergence: successive higher highs in price against successive lower highs in the oscillator.

A price double top versus a lower oscillator high is a strong but lesser mismatch. That is a price double top divergence: equal price highs against a lower second high in the oscillator.

A higher price high versus equal oscillator highs is the weakest class. That is an indicator double top divergence, and the ranking says to ignore it unless another indicator confirms.

Inverted and running cases

A lower high in price against a higher high in the oscillator is inverted divergence. It is interpreted as bearish, on the reading that the market became more overbought while failing to make a new price high. The label is failed upside follow-through rather than a bullish all-clear.

A running sequence of new price highs against successively lower oscillator highs can abort the first mismatch. Running divergence is three or more successive price extremes that keep disagreeing with the oscillator. The procedure pairs that pattern with tight loss control and the option to re-enter after a small failed attempt.

Trend following as the governing filter

Trend following is treated as the governing filter. Rising, falling, or sideways conditions, plus cycle stage and mood, determine whether a top or bottom oscillator mismatch is even eligible for analysis. Only after those conditions are named does a divergence hypothesis fire.

A more conservative procedure withholds the sell or short until a trendline break or a close beneath a significant moving average. The same directional conclusion can therefore arrive later than a divergence-first rule.