A Divergence occurs when an indicator and the price of a security (or index) move in opposite directions. This is a technical indicator. When a technician sees a price moving one way, and an oscillator moving the other, they react. An oscillators indicate an overbought or oversold state. If the oscillator is heading downward, and the price is moving up, this signifies a potential soon to come bear market. Vice versa, if the oscillator is heading up and the price is heading down, we may soon see a bull market.

The most common oscillators are: ROC, Money Flow Index (MFI), Stochastics, and %R

Here is an example of Ford's divergence a little more than a year ago. Here I used a ROC Oscillator. If you notice the uptrend of the ROC, and the downtrend in the price of Ford, it is evident there is a clear divergence in these two trends.

This is a negative divergence, and what we look for when we want to take a SELL position. Some people even use negative divergence as price moving down, and indicator moving down.

A positive divergence is opposite. If price were downward, and the indicator moving upward, we can assume prices will rise soon.

Look what happened after we noticed the postive divergence on Forward Industry's chart. A major bull market soon followed.

Oscillators by themselves can be used for determining overbought and oversold states. This oscillator I used (ROC) , is used for determine momentum. ROC - Rate of Change, which is the price change in percent from the most recent price, to "n" days. In this case, I used a 28 day Oscillator. The ROC hovers around zero. When it is above zero, there is an increase in momentum, below zero means a decrease in momentum.