The Divergence & Support/Resistance Confluence Strategy combines two of the most reliable elements in technical analysis — momentum divergence and horizontal support/resistance levels — to identify high-probability reversal setups. When price reaches a key level and divergence appears on momentum indicators like RSI or MACD, it signals potential exhaustion of the prevailing trend and sets the stage for a powerful move in the opposite direction.

This strategy is ideal for swing traders, position traders, and technical analysts looking to catch early reversals or avoid chasing trends that are losing steam.

What Is Divergence in Trading?

Divergence occurs when the direction of a momentum indicator contradicts the price trend. It suggests that the momentum behind the move is weakening, even if price continues making new highs or lows.

Types of divergence:

• Bullish Divergence: Price makes a lower low, but indicator makes a higher low (potential reversal upward)
• Bearish Divergence: Price makes a higher high, but indicator makes a lower high (potential reversal downward)

Common indicators used:

• RSI (Relative Strength Index)
• MACD Histogram or Signal Lines
• Stochastic Oscillator

Role of Support and Resistance

Support and resistance are horizontal price levels where buying or selling interest is historically strong. These levels represent psychological inflection points where price often stalls, reverses, or breaks with conviction.

In this strategy, divergence near key S/R levels is the main entry trigger — increasing the likelihood of a reversal.

Strategy Setup

Step 1: Identify Key Support or Resistance

Use a higher timeframe (4H, Daily) to draw horizontal zones:

• Swing highs and lows
• Consolidation areas
• Institutional price levels (round numbers)
• Previous breakout or breakdown points

Step 2: Monitor for Divergence

Switch to a trading timeframe (1H–4H) and apply RSI or MACD.

• Look for bullish divergence as price approaches a major support level
• Look for bearish divergence near resistance or after an extended rally

Step 3: Wait for a Rejection or Confirmation Candle

Look for price action clues such as:

• Pin bar or hammer at support (bullish)
• Shooting star or bearish engulfing at resistance (bearish)
• Break of a minor trendline or neckline for confirmation

Step 4: Execute with Defined Entry and Stop

• Entry: After confirmation candle closes in the direction of divergence
• Stop: Just beyond the S/R level or recent swing high/low
• Target: Based on prior structure, 2× ATR, or risk-reward ratio

Example Trade: Bullish Divergence at Support

• Price: BTC/USD falls to a prior daily support zone at $25,000
• RSI: Shows higher low while price forms lower low (bullish divergence)
• Confirmation: 4H bullish engulfing candle forms off support
• Action: Enter long, stop just below $24,800, target previous swing high at $26,200

This setup aligns price, momentum, and structure — a classic confluence entry.

Strategy Variations

• Double Divergence: When divergence occurs twice at the same level — a powerful reversal signal
• Trendline + S/R Confluence: Combine divergence with trendline break at support or resistance
• EMA Confluence: Use dynamic support like the 200 EMA with divergence for additional confirmation

Risk Management

• Risk no more than 1–2% per trade
• Always trade from S/R zones — avoid mid-range entries
• Confirm divergence on the same timeframe as price action
• Avoid divergence during low-volume or choppy market conditions

Advantages of the Strategy

• High probability of reversal when both signals align
• Objective entries based on structure and momentum
• Works in all markets and timeframes
• Reduces overtrading by filtering setups strictly
• Ideal for discretionary or rule-based trading styles

Conclusion

The Divergence & Support/Resistance Confluence Strategy is a precise and powerful tool in any trader’s arsenal. By combining market structure with momentum exhaustion, it delivers well-timed, high-reward setups that often precede strong reversals. With practice, discipline, and risk control, this strategy can significantly improve trade quality and overall performance.

To master divergence detection, multi-timeframe S/R analysis, and confluence trading techniques, enrol in the professional Trading Courses at Traders MBA.