Divergence: When Price and Its Indicators Disagree
A <strong>divergence</strong> is a disagreement between price and a confirming indicator. The most common types are <em>RSI divergence</em> (price makes a new high, RSI does not) and <em>OBV divergence</em> (price rises while cumulative volume flags). Divergences don't predict reversals on their own. What they do is flag moves that lack internal confirmation — moves where the surface appearance and the underlying participation have come apart.
The two kinds Closelook tracks
The Temperature worker records two divergence states per instrument:
Price-RSI divergence
When price and the 14-period RSI trace opposite extremes. A bearish RSI divergence: price makes a higher high while RSI makes a lower high — momentum isn't confirming the price move. A bullish RSI divergence: price makes a lower low while RSI makes a higher low — selling pressure is exhausting even as the price extends.
On-Balance-Volume (OBV) divergence
When price and cumulative volume disagree on direction. Bearish OBV divergence: price keeps rising while OBV plateaus or falls — the rally is thinning out. Bullish OBV divergence: price keeps falling while OBV flattens or rises — sellers are being absorbed.
How to read a divergence
The crucial thing about divergences is that they can persist. A bearish RSI divergence can last for weeks before resolving, sometimes resolving with RSI simply catching back up rather than price falling. Divergence is a warning, not a trigger. It says: "something about this move is weaker than it looks."
Divergences become actionable when they align with other signals. A bearish RSI divergence coinciding with a stack flip and a rising Fragility score is a very different setup from an isolated divergence on its own.
Why it matters
The best trends have confirming internals. When a move is genuine, momentum and volume move with price. When a move is fragile, they don't — and divergences are the visible residue of that fragility. Traders who track divergences over months often notice the pattern where a string of dismissed "false" divergences finally resolves in a single large move. The dismissal isn't wrong; the signal just has a long fuse.
In the Lab, divergences appear both as a state marker (the current instrument is in divergence) and as an event (the divergence first appeared on this date). The event log captures the moment of first appearance, so you can see how long a divergence has been live before it resolved.