What is the primary use of divergences in technical analysis?

Divergences in technical analysis are primarily used as signals for potential reversals or shifts in market momentum. When price movements and indicators, such as oscillators or moving averages, do not align, this discrepancy suggests that the current price trend may be losing strength.

For instance, if the price reaches a new high while the indicator fails to do the same, it indicates a weakening of buying pressure and can be a precursor to a trend reversal. Conversely, when prices hit a new low but the indicator shows a higher low, it suggests a potential upturn as selling pressure may be waning.

Recognizing these divergences helps traders to make informed decisions about entering or exiting positions based on the likelihood of a change in market direction. While divergences certainly provide insights into market sentiment and potential turning points, they do not serve as definitive confirmations of price trends, nor do they predict earnings announcements or assess broader macroeconomic conditions directly.