TL;DR
Everyone in crypto wants an answer to the golden question: where will the bitcoin price go next? Although no one truly knows future price action until it happens, price divergence can sometimes be used to help answer that question.
Divergence occurs when price makes higher highs, while indicators paint lower lows or vice versa. Simply put, divergence is when price direction contradicts indicator direction, creating a noticeable conflicting pattern.
The Bitcoin daily chart pictured above shows a bullish divergence between price action and the Relative Strength Index (RSI – Purple line). Price showed a clear downward trend, while the RSI showed an upward trend. This means that although the price may be falling, market sentiment is gaining strength.
This concept also works oppositely as well, as seen in another daily bitcoin chart example above. A definite bearish divergence was seen during bitcoin’s climb to break new all-time high prices twice: Nov-Dec 2017 whereas BTC climbed towards $20K and lost over 80% in 12 months, and also during the current ATH around $65K, which was recorded on April 2021.
In both cases, as the price climbed toward its peak, the RSI posted a downward pattern, indicating a market reversal – or bearish divergence.
As with many chart patterns and concepts, divergences must be noted about their time frames. Divergences can often be spotted in many different time frames, even including short-term charts like the 15-minute chart although it is important to note that higher time frame divergences often have more weight and impact. In other words, it can be easy to miss the bigger picture while being too focused on the present.
Aside from the regular divergence, the second popular type of divergence is the hidden one. Hidden divergence spots trend continuation, unlike regular divergence, which spots trend reversal.
Please refer to the following divergence cheat sheet. As you can see, bullish/bearish hidden divergence occurs when the price makes lower/higher lows, and the indicator makes higher/lower lows.
Additionally, it is essential to apply the concept of divergence with other factors, such as support and resistance levels or moving averages. Technical analysis in bitcoin and crypto is often a game of confluence. One view or indicator on its own often can be misleading. Using several methods together, however, can often be more effective.
It is also important to note that nothing is guaranteed (otherwise, everyone was rich). Price can make unexpected moves, even regarding larger time frames with multiple signals of confluence. Even textbook plays can take unexpected turns.
