Bearish Divergence describes a technical analysis pattern where the price of a crypto asset establishes a higher high, but a momentum indicator, such as the Relative Strength Index (RSI), registers a lower high. This situation suggests that upward price movement lacks underlying strength, potentially indicating an impending price reversal or downward trend.
Mechanism
The mechanism involves the independent calculation of price action and an oscillator-based momentum indicator. As price pushes higher, the indicator’s failure to reach a new peak signals diminishing buying pressure or increasing selling interest at higher price levels. This discrepancy highlights a weakening trend despite surface-level price gains.
Methodology
The methodology employs the concurrent analysis of price charts and momentum indicators to identify this specific pattern. Traders and algorithms use this signal as a probabilistic indicator for potential short positions or for closing existing long positions. Confirmation often involves observing subsequent price action breaking key support levels.
This event signals a potential systemic liquidity reallocation from traditional safe-havens to digital assets, optimizing portfolio alpha for agile principals.
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