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Confirmation / Divergence

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Confirmation: Verifying a price movement with a technical indicator. For instance, if within a given period, a stock price reaches a new high, it would be considered a confirmation if a price oscillator such as RSI also reaches a new high at the same time in that period.

Divergence: When a new price or indicator high or low is not verified by a comparable technical indicator.

This is a daily chart of the NASDAQ Composite Index, and shows examples of both divergence and confirmation. Overlaid on the chart are two moving averages and plotted above the chart is the stochastics oscillator.

In February of 1998, as price was moving upwards, stochastics was at the level illustrated by the horizontal line. When the stock made new highs in March and April, there failed to be new highs in the stochastics. This divergence could have suggested that the price movement may not be able to sustain itself. According to conventional interpretations of the stochastics indicator, it could mean that the market was overbought, a sentiment that some investors felt towards technology stocks during the spring of 1998.

The downward movement in May and June could have been confirmed by the short-term moving average crossing below the longer-term moving average, with both slopes turning downward.


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