Bearish Divergence

A bearish divergence between the price and a technical indicator is a moderately useful tool for detecting a coming reversal in the bullish trend. Bearish divergence in gold is therefore a moderately bearish signal for the gold market.

The advantage of using bearish divergences is that it’s usually clearly visible, while the downside is that it doesn’t provide a precise sell signal. The divergence occurs when the price of an asset is somehow not in tune with what it is supposed to. For instance – when gold is advancing but silver and/or mining stocks start to move lower – we see a bearish divergence.

The most common divergences are between asset’s price and some indicator based on it (for instance gold price and RSI based on the gold price). In this case, the divergence occurs when price forms a higher high and the indicator forms a lower high. It shows us that even though price reaches new highs, the fuel for the uptrend starts running low. Divergence can show up on virtually any indicator’s chart, but the rule is always the same: the indicator does not confirm the price move.

Bearish Divergence in Gold

The following chart shows an example of bearish divergence on the gold market:

The top at the end of February was significantly higher than the one from the beginning of that month, while the end-of-February RSI peak was lower than the one from the previous one.

Bearish Divergence in Silver

Bearish divergences appear on the silver market as well. The chart below illustrates one crucial idea when it comes to divergences: they do not necessarily show up on every indicator’s chart.

The high from the beginning of April on the RSI chart was lower the one from the beginning of January, while the corresponding highs were equal on the chart of Stochastic Oscillator and the April high was even higher than the January one on the chart of MACD. Another important thing to remember here is that a bearish divergence should be confirmed in order to be treated as a bona fide buy signal. The confirmation can take place either on the price chart (breaking a previous support line) or the indicator chart (crossing an overbought line or centerline from above in case of oscillators such as RSI or Stochastic; crossing the signal line by the indicator line from aboveas in case of MACD, for instance) – or both.

Summary

A bearish divergence is an important and quite common notion in technical analysis and it is a very universal phenomenon (i.e. it can be seen on the charts of virtually all technical indicators) and yields a moderately reliable sell signal – the plus is that it’s seen quite often and is not too complicated; the downside is there is no clear sell signal. Consequently, we suggest using divergences along with other tools that provide such signals.

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