What does divergence in technical analysis signify?

Divergence in technical analysis is a concept that occurs when the price movement of an asset and its corresponding momentum indicator move in opposite directions. This discrepancy can signal a potential reversal of the current price trend. Specifically, if prices are making new highs while the indicator is making lower highs, or if prices are making new lows while the indicator is making higher lows, this creates a situation termed divergence. Such a scenario suggests that the prevailing trend may be losing strength and could be poised for a reversal, alerting traders to reassess their positions.

Understanding this concept is crucial for traders, as recognizing divergence can help them make informed decisions about entries and exits, especially in volatile markets. This potential reversal is what makes divergence an important signal in technical analysis, as it can indicate that momentum may be shifting and that traders should be cautious about the sustainability of the current trend.