What does a divergence between price and the divergence index suggest?

A divergence between price and the divergence index typically indicates a trend reversal or weakness. Price divergence occurs when the price of an asset moves in a direction that is not confirmed by the divergence index, which might be a momentum indicator or another similar metric.

For instance, if prices are making higher highs while the divergence index shows lower highs, this suggests that while the price continues to grow, the underlying momentum is weakening. This lack of agreement between price movement and the indicator can be a signal to traders that the prevailing trend may not be sustainable and could lead to a reversal.

Understanding this divergence is crucial for traders as it can help identify potential turning points in the market, alerting them to modify their strategies accordingly. This signals that the strength of the current trend is diminishing, possibly paving the way for a trend shift.