Momentum Divergence
Momentum divergence occurs when price makes a new high or low but a momentum indicator like RSI or MACD does not confirm by making a corresponding new high or low. In Elliott Wave analysis, divergence between Wave 3 and Wave 5 is one of the most reliable signals available. Wave 3 is the strongest wave with the most momentum. Wave 5 pushes price to new extremes but with fading energy. This creates a textbook divergence pattern. You see price making a higher high in Wave 5 while RSI or MACD prints a lower high compared to Wave 3. This divergence tells you the trend is running on fumes. It does not tell you exactly when the reversal will happen, but it tells you the end is near. Traders use momentum divergence to start tightening stops, reducing position size, or preparing counter-trend entries. Divergence also appears within sub-waves, so you can spot it on multiple timeframes. When you see divergence on both the daily and weekly charts simultaneously at a Wave 5 completion, the reversal signal is particularly strong.
The S&P 500 completes Wave 3 at 5,400 with RSI reaching 82. Wave 4 corrects to 5,200. Wave 5 rallies to 5,500, a new all-time high. But RSI only reaches 68 on this new high. That gap between RSI at 82 (Wave 3) and RSI at 68 (Wave 5) is bearish momentum divergence. MACD tells the same story, with its histogram bars shorter during Wave 5 than during Wave 3. A trader who spots this divergence sells 50% of their long position at 5,480 and moves their stop to breakeven on the rest. The index reverses from 5,520 and falls 8% over the next two months in an A-B-C correction.