Bullish Divergence

What Does Occurrence of Bullish Divergence Means?

Stock Market

There are various trading strategies and technical indicators that are used by the analysts to trade efficiently. These technical indicators are easily adaptable and easy to deploy. Relative Strength Index is one of the most widely used eminent technical indicators. The relative strength index is a technical index used in the study of financial market or stock markets. The traders keep RSI indicator in the category of momentum oscillator, which measures the speed and the direction of the price movements. Here, momentum of the price implies the rate of rise and fall in the price of the assets. The RSI calculates the percentage of the higher closes to the lower closes. The stocks having the stronger positive changes have the higher value of RSI as compare to the stocks having the stronger negative changes. Usually the RSI is implemented on a timeframe of 14-days. However, traders manipulate the time and use RSI for any timeframe. RSI is the most commonly used technical indicator for analyzing the stock all over the world. RSI is calculated on the scale from zero to 100, where the point 70 is marked to be high level and the point 30 is marked to low level. Experts consider the levels of 80 and 20 as extreme high levels and low levels respectively, while 90 and 10 are the less occurred levels that show the stronger momentum.

Occurrence of Bullish Divergence

According to Wilder, the bullish divergence occurs when the price of stock makes lower low and the RSI makes higher low. The divergence indicates the possible reversal point in the chart. When there is no new low shown by RSI then it is considered as strongest momentum. The bearish divergence occurs when the price of stock makes higher high and the RSI makes lower high. However, if there is no new high represented by RSI then it is considered as weakening momentum. In RSI, failure swings are not dependant on the price action since they focus mainly on the signals generated by RSI. It simply ignores the concept of divergences. The bullish failure swing occurs, when the RSI moves below 30 at stage of oversold. Before the RSI breakdown its previous high, it bounces above 30, pulls back and holds above 30. It is said that the breakdown occurs in manner to reach oversold levels and then goes higher low on top of oversold levels.

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