What is indicated by negative divergence in the markets?

Negative divergence occurs when the price of a security or an index reaches new highs while an accompanying indicator, such as volume or momentum, fails to confirm these highs, often showing lower values instead. This inconsistency suggests a weakening underlying demand, indicating that even though the price is increasing, the momentum behind that price movement is declining.

In the context of technical analysis, this lack of confirmation is a red flag for traders as it can signify a potential reversal or weakening of the upward trend. Thus, the observation of new price highs not supported by expanding market breadth or a corresponding increase in other market indicators is a classic sign of negative divergence. It suggests a risk of a future setback in the price trend, as the market's bullish sentiment may be unhealthy or unsustainable at those peak levels.

Other options do not accurately capture the essence of negative divergence. Broad optimism despite falling prices refers more to a general sentiment than to a specific technical condition. Stock prices moving in unison suggests market coordination rather than divergence. Finally, a consistent advance in market indicators suggests strength and support for price trends, contrary to the weaknesses highlighted by negative divergence.