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Divergence is a phenomenon in technical analysis that states that the underlying security is probably poised for a reversal after a specific type of price action with respect to an oscillator. All indicators (including oscillators) are just a derivative of the price and/or volume and therefore they move in tandem with it.
However, there are a few times when we see a disagreement between what the price is doing as compared to what its indicator is depicting. This mismatch is popularly called a divergence. More precisely, when the price makes a higher high (or lower low) and the corresponding oscillator fails to make a higher high (or lower low) is called a divergence.
This instance depicts a slowdown of the ongoing bullish/bearish momentum which is generally an early warning of a trend reversal, at least temporarily.
Image Description: Daily chart of Glenmark Pharmaceuticals with RSI at the bottom
Image Source: Investing.com
Looking at the daily chart of Glenmark Pharmaceuticals Ltd (NS:), which is a midcap pharma company with a market capitalization of INR 22,501 crore, there is a crystal clear formation of a bearish divergence. When the stock marked its second peak on 9 August 2023, the RSI (daily, 14) failed to print a new peak on the chart (as can be seen from the chart above).
This price pattern has taken place at the 52-week high of the stock which further strengthens the probability of a reversal, all thanks to a very sharp one-sided rally this year which makes a strong case for mean reversion. Currently, the stock is trading 1.8% down at INR 783, by 11:55 AM IST and there is support around INR 777 – INR 771.
Traders can keep a tab on this counter as once this level gets taken out, the stock can slide straight to the next level of INR 700. Those holding long positions might also want to tighten their stops to conserve most of the profits.
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