rsi-divergence

RSI Divergence

Divergences signal that momentum is fading — price is moving one way but the engine (RSI) is losing steam. They're early warnings, not guarantees.

Prerequisites

No dependencies required. Describe price and RSI patterns verbally and Claude identifies divergences. Enhanced with Groww MCP (RSI values, candles) or yfinance (pip install yfinance).

Data Needed

1. Daily candles: fetch_historical_candle_data (last 90-120 days) or user-provided
2. RSI(14) values: get_historical_technical_indicators from Groww
3. For manual calculation via yfinance if needed: ```python import yfinance as yf data = yf.download("SYMBOL.NS", period="6mo") # Calculate RSI from close prices ```

Regular Divergence (Reversal Signal)

Regular divergence suggests the current trend may be exhausting.

| Type | Price Makes | RSI Makes | Meaning | |------|-----------|-----------|---------| | Bullish | Lower low | Higher low | Selling pressure fading — potential bottom | | Bearish | Higher high | Lower high | Buying pressure fading — potential top |

How to Identify

1. Find the last 2-3 swing lows (for bullish) or swing highs (for bearish) on the price chart
2. Mark the corresponding RSI values at those same candles
3. If price makes a new extreme but RSI doesn't — that's divergence

Strength Grading

| Signal | Strength | |--------|----------| | 2-point divergence (2 swings) | Standard | | 3-point divergence (3 swings) | Strong | | Divergence + oversold/overbought RSI | Stronger | | Divergence + volume decline | Strongest |

Hidden Divergence (Continuation Signal)

Hidden divergence suggests the existing trend will continue after a pullback.

| Type | Price Makes | RSI Makes | Meaning | |------|-----------|-----------|---------| | Bullish | Higher low | Lower low | Uptrend healthy — pullback is a buying opportunity | | Bearish | Lower high | Higher high | Downtrend healthy — rally is a selling opportunity |

Hidden divergence is often overlooked but very powerful in trending markets.

Trading Divergences

Entry Strategy

1. Identify the divergence on daily chart
2. Wait for confirmation — do NOT enter on divergence alone
3. Price breaks above the minor trendline connecting the swing points
4. RSI crosses above 30 (bullish) or below 70 (bearish)
5. A bullish/bearish engulfing candle at the divergence point
6. Enter on the close of the confirmation candle
7. Stop-loss: Below the divergence low (bullish) or above the divergence high (bearish)
8. Target: Previous swing high/low, or use Fibonacci levels (→ fibonacci-trading skill)

Risk Management

Entry: Confirmation candle close
Stop: Below divergence swing low + 1% buffer
Target 1: Previous swing high (conservative)
Target 2: Fibonacci extension 127.2% (moderate)
Target 3: Fibonacci extension 161.8% (aggressive)

Important Caveats

• Divergence can persist: In strong trends, you can see multiple divergences before price actually reverses. This is why confirmation is mandatory.
• Timeframe matters: Daily divergences are more reliable than hourly. Weekly divergences are the most significant.
• Not standalone: Always combine with other evidence (S/R levels, volume, trend analysis). Divergence is one input, not the whole thesis.
• False divergences: If the RSI is in the 40-60 neutral zone, divergence signals are less meaningful. Best signals come from oversold (<30) or overbought (>70) zones.

Quick Reference

Bullish regular:  Price ↓↓  RSI ↗  → Potential reversal UP
Bearish regular:  Price ↑↑  RSI ↘  → Potential reversal DOWN
Bullish hidden:   Price ↗   RSI ↓↓ → Trend continues UP
Bearish hidden:   Price ↘   RSI ↑↑ → Trend continues DOWN