Technical Analysis: Divergences, Candlestick Patterns, and Market Breadth

What is negative divergence and what does it usually signal?

Negative divergence is when price makes a higher high but a momentum oscillator (like RSI or MACD) makes a lower high; it usually signals weakening upside momentum and a possible bearish reversal or correction.

What is positive divergence and what does it usually signal?

Positive divergence is when price makes a lower low but a momentum oscillator makes a higher low; it usually signals weakening downside momentum and a possible bullish reversal or rally.

What is the basic difference between a divergence and a reversal?

Divergence is a warning that the indicator disagrees with price but the trend may still continue; a reversal is an actual change in price trend (up to down or down to up).

What is a negative failure swing in an oscillator?

A negative failure swing occurs when the oscillator leaves overbought, rebounds but fails to return to overbought, and then breaks below its prior low; it is a bearish signal.

What is a positive failure swing in an oscillator?

A positive failure swing occurs when the oscillator leaves oversold, pulls back but fails to return to oversold, and then breaks above its prior high; it is a bullish signal.

What does a doji candlestick generally indicate?

A doji (open ≈ close) generally indicates indecision; after a strong move it can warn of a potential reversal if confirmed.

How do you recognize a hammer candlestick and what does it mean?

A hammer has a small body near the top of the range with a long lower shadow and little or no upper shadow; after a decline it is a bullish reversal signal.

How do you recognize a hanging man candlestick and what does it mean?

A hanging man has the same shape as a hammer but appears after an uptrend; it is a bearish warning signal.

How do you recognize a shooting star and what does it usually signal?

A shooting star has a small body near the low with a long upper shadow and little or no lower shadow; after an uptrend it is a bearish reversal signal.

How do you recognize an inverted hammer and what does it usually signal?

An inverted hammer has a small body near the low with a long upper shadow and appears after a downtrend; it is a bullish reversal signal.

What is a bullish engulfing pattern?

A bullish engulfing pattern is when a small bearish candle is followed by a larger bullish candle that completely engulfs the prior body in a downtrend, signaling a bullish reversal.

What is a bearish engulfing pattern?

A bearish engulfing pattern is when a small bullish candle is followed by a larger bearish candle that completely engulfs the prior body in an uptrend, signaling a bearish reversal.

What is a dark cloud cover pattern?

A dark cloud cover is a bearish top pattern where a long bullish candle is followed by a candle that gaps up but closes at least halfway into the prior real body, shifting control to sellers.

What is a piercing line pattern?

A piercing line is a bullish bottom pattern where a long bearish candle is followed by a candle that gaps down but closes at least halfway into the prior real body, shifting control to buyers.

What is a morning star candlestick pattern?

A morning star is a three-candle bullish reversal at a bottom: long down candle, small "star" candle (often gapping down), and a strong up candle closing well into the first candle's body.

What is an evening star candlestick pattern?

An evening star is a three-candle bearish reversal at a top: long up candle, small "star" candle (often gapping up), and a strong down candle closing well into the first candle's body.

What is a breakaway gap and where does it usually appear?

A breakaway gap occurs when price gaps out of a consolidation or base and usually appears at the start of a new trend; it often confirms a new move when supported by high volume.

What is a runaway (measuring) gap and where does it usually appear?

A runaway or measuring gap occurs in the middle of a strong trend and often marks roughly the halfway point of the move, suggesting trend continuation.

What is an exhaustion gap and where does it usually appear?

An exhaustion gap appears near the end of a long trend, often on emotional or climactic trading, and is frequently followed by stalling or a reversal.

How can you distinguish a runaway gap from an exhaustion gap using follow-through?

A runaway gap tends to see continued movement in the direction of the gap after a short consolidation, while an exhaustion gap is often quickly filled and followed by stalling or a sharp reversal.

What is a spike (wide-range bar)?

A spike is a single bar with a much larger range than recent bars, usually on high volume; it can mark the start of a strong move if followed through or an exhaustion climax if quickly reversed.

What is a one-bar reversal pattern?

A one-bar reversal occurs when price makes a new high and then closes weak near the low (in an uptrend) or makes a new low and then closes strong near the high (in a downtrend), signaling a short-term reversal.

What is a two-bar (pipe) reversal pattern?

A two-bar or pipe reversal consists of two large bars with similar highs (at a top) or similar lows (at a bottom) forming a "pipe," and it can mark a turning point with a tight stop beyond the extreme.

What is an inside bar and how is it usually traded?

An inside bar has a high-low range completely within the prior bar's range; it shows consolidation and is often traded by entering on a breakout above the high or below the low of the inside bar.

What is an outside bar and what does it show?

An outside bar has a higher high and lower low than the previous bar; it shows expanded volatility and can be a reversal or continuation signal depending on the close and context.

What is market breadth?

Market breadth is a measure of how many stocks are advancing versus declining, used to gauge how broad or narrow a market move is.

What is the Advance-Decline (A/D) line?

The A/D line is a cumulative line created by adding net advances (advancers minus decliners) each day; it shows whether more stocks are participating in a move.

What is negative breadth divergence?

Negative breadth divergence occurs when the major index makes higher highs but the A/D line fails to make higher highs, indicating weak participation and potential trouble for the rally.

What is the McClellan Oscillator used for?

The McClellan Oscillator is a short-term breadth oscillator based on EMAs of net advances and is used for short to intermediate-term timing and zero-line signals.

What is the McClellan Summation Index used for?

The McClellan Summation Index is the cumulative total of the McClellan Oscillator and is used to assess the longer-term trend in market breadth.

What is the difference between an index-type indicator and an oscillator?

Index-type indicators are cumulative and trend over time (like OBV or A/D line), while oscillators swing up and down within a range and are better for spotting overbought/oversold and short-term turns.

What is a bounded oscillator and give an example?

A bounded oscillator has a fixed range of values, such as RSI which ranges from 0 to 100; it is used to identify overbought and oversold conditions.

What is an unbounded oscillator and give an example?

An unbounded oscillator has no fixed maximum or minimum value, such as MACD; it is used more to gauge trend direction and strength than strict overbought/oversold levels.

How is MACD constructed in general terms?

MACD is constructed by subtracting a longer-term EMA from a shorter-term EMA to create the MACD line, then applying an EMA to that line as a signal line; the histogram is the difference between MACD and its signal line.

What are two common MACD signals?

Two common MACD signals are MACD crossing above or below the signal line (bullish or bearish momentum shifts) and MACD crossing above or below the zero line (bullish or bearish overall bias).

What does ADX measure?

ADX (Average Directional Index) measures the strength of a trend, not its direction; high ADX means a strong trend, low ADX means a weak trend or range-bound market.

How do traders generally use ADX to choose strategy?

When ADX is high and rising, traders favor trend-following strategies like breakouts and moving-average systems; when ADX is low or falling, they favor range-trading and mean-reversion strategies using oscillators.

What does the saying "The trend is your friend (until it ends)" mean in trading?

It means traders should align with the prevailing trend while indicators like breadth, ADX, and momentum confirm it, but be ready to reduce risk or look for reversals when those tools show the trend is weakening.

What is confirmation in technical analysis?

Confirmation is independent evidence from another indicator, time frame, or market that supports a price signal and increases confidence in the trade.

Why is volume often used as a confirming indicator?

Volume is used as confirmation because high or rising volume on a breakout or breakdown shows strong participation and commitment, making the move more reliable.

What is box size in point-and-figure (P&F) charting?

Box size is the price increment represented by each X or O in a P&F chart; smaller box sizes show more detail and noise, larger box sizes show fewer but more significant moves.

What is the reversal amount in P&F charting?

The reversal amount is the number of boxes price must move in the opposite direction to start a new column of Xs or Os; 3-box reversals are common.

What is a basic buy signal in P&F charting?

A basic buy signal in P&F is a double-top breakout, where a column of Xs breaks one box above a prior column of Xs at the same level.

What is a basic sell signal in P&F charting?

A basic sell signal in P&F is a double-bottom breakdown, where a column of Os breaks one box below a prior column of Os at the same level.

What is a bullish support line in P&F charting?

A bullish support line is an up-sloping diagonal line drawn under rising columns of Xs after a buy signal, representing an uptrend; price staying above it is considered bullish.

What is a bearish resistance line in P&F charting?

A bearish resistance line is a down-sloping diagonal line drawn above falling columns of Os after a sell signal, representing a downtrend; price staying below it is considered bearish.