Bearish Technical Patterns Appearing

Bearish candlestick patterns can sometimes be useful when attempting to predict potential reversals. Knowing when the price can possibly turn around can be very profitable for swing traders.

There are many bearish technical patterns, but the one I utilize most often is Bearish MACD or RSI Divergence.

Bearish divergence occurs when a tickers price action is diverging or deviating from the implications of the oscilating indicators, like MACD and RSI.

Basically, the price is moving up strongly while the indicators are showing a weakening trend.

MACD Divergence

I have provided an example of MACD Divergence in the chart below. Notice the price action of $Invesco QQQ Trust(QQQ.US)$ making higher highs indicating a strong uptrend. Also, take note of the MACD indicator printing lower highs on the chart. This indicates that the uptrend is getting weaker. Can you see the divegence?

Also, take notice of the selling that followed the divergence. I have highlighted the selling by the red candle. This selling occurred because, based on the indicators, uptrend was losing strength. External factors usually contribute to the selling as well.

RSI Divergence

RSI Divergence works in the same way as MACD divergence. You can see this illustrated in the chart below. This time, we can see it on the weekly candles with $Oracle(ORCL.US)$. The price makes higher highs while RSI is making lower lows. Then the selling begins.

Sometimes, you can be a bit more confident in your reversal call if you have other factors working in your favor. Other factors like bearish sentiment or general sector underperformance. Here is an example with $Meta Platforms(META.US)$.

During this time in the market, bearish sentiment was growing within the tech sectors. Technology companies were beginning to underperform the value companies and and most technology companies were trending down or at least in a consolidation phase.

When this is the case in equity markets, and you see MACD and RSI both flashing bearish divergence, then you could have a little more confidence in the bearish reversal call for a tech company like META.

Possible Divergence Opportunity

Now that we have gone over the basics of bearish divergence, I want to provide a real-life example of a potential divergence that could possibly transpire very soon.

This one involves $NVIDIA(NVDA.US)$. The weekly candles are making higher highs while the indicators are signaling a weakening trend.

Will NVDA experience a substantial reversal in price action? Personally, I would not short a strong name in a very strong rally like NVDA is going through. I always say that some selling should be expected in a healthy rally. so if there is continued weakness in the semiconductor sector and this divergence is confirmed, then I would be looking for a dip buy opportunity in this ticker.

Divergence in AMC Stock?

I couldn't leave you without throwing the Apes a bone. There is such a thing called Bullish Divergence. It is as simple as it sounds. Bullish divergence is the inverse of bearish divergence. When the price action is making lower lows but the sub indicators are making higher highs, then you have a bullish divergence.

I should also mention that sometimes you will get false readings with divergence patterns, and a reversal may not take place. This brings me to my next example with $AMC Entertainment(AMC.US)$. You can see a bullish divergence with AMC in the chart below. This is on the very short time frame with 4-hour candles. If this bullish divergence is confirmed, then it might warrant a very short-term swing trade to the upside.

Conclusion

Divergence is great for preditcing potential reversals. Divergence works in both directions, either bullish or bearish. And you can use it on any time frame. But it is not 100% reliable all of the time. The smaller the time frame, or candlesticks, then the more false signals that can be produced. Utilizing the divergence strategy can be a valuable addition to the many other bullish or bearish indicators you might use. When you see divergence occurring and it coincides with a change in market sentiment or a breakout/breakdown of the current trend, then you can make entering a trade a lot less stressful.

So, do you use the principles of divergence in your trading or investing?

As always, this is not investment advice. Good luck trading. Be careful and be patient. Dont anticipate the market. Rather, participate in the market. Give your investments time. Don't be greedy. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. Do your own due diligence. And just follow the trends. A trend is your friend.