What is a bullish divergence?

A bullish divergence is a technical chart pattern that indicates a potential upward price movement. It occurs when the price of an asset forms a new low, but the technical indicator fails to do the same, suggesting that the downward momentum is weakening and a reversal to the upside is possible. This pattern is often observed as a sign that market sentiment is shifting from bearish to bullish. 1. **Definition**: A bullish divergence is formed when the price chart creates a new low, but the indicator, such as the Relative Strength Index (RSI), fails to produce a new low corresponding to the price low. This discrepancy indicates a potential reversal of the downtrend. 2. **Types**: There are different levels of bullish divergence, classified as Class A, B, and C, based on their strength. Class A is the most potent and typically signals a sharp upward rally. 3. **Indicators**: Bullish divergences are often identified using oscillators like the RSI, where a higher bottom in the oscillator indicates strengthening momentum despite the price falling. 4. **Market Impact**: This pattern is considered a bullish signal, indicating that the bears are losing power, and the market may shift from a downtrend to an uptrend. It is commonly used in technical analysis to anticipate potential reversals. In summary, a bullish divergence is a technical indicator that suggests a potential upward price movement by highlighting a discrepancy between the price and the momentum indicator, indicating a possible reversal from a downtrend to an uptrend.