Insight into Divergence Patterns: Mastering the Key Signals for Reversal in Cryptocurrency Market Trends

When the crypto market hesitates in choosing a direction, divergence patterns in technical analysis often provide key clues.

According to Gate exchange data, as of January 5, 2026, Bitcoin’s price has been fluctuating slightly around $92,500. This two-week-long sideways consolidation has led to a significant narrowing of Bollinger Bands, reaching the lowest level since July last year.

01 Fundamentals of Divergence Patterns

In simple terms, divergence patterns are discrepancies between market price and technical indicators. When the price hits new highs or lows while the technical indicators fail to confirm this movement simultaneously, divergence occurs.

This discrepancy suggests that the current trend’s momentum is weakening, and a reversal may be imminent.

Oscillators such as RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) are commonly used tools to identify divergence. These indicators measure overbought or oversold conditions in the market, helping traders assess trend strength.

Normally, when the price makes a new high, the oscillator should also rise; when the price makes a new low, the oscillator should fall. Divergence breaks this synchronization, serving as an early warning signal of a potential trend reversal.

The appearance of divergence is often closely related to changes in market supply and demand. In the crypto market, each trade can be viewed as a momentum-driven “marble,” while orders at different price levels form uneven “glass layers.”

When the price hits a new high but the indicator weakens, it indicates that although the price is still rising, the momentum of the “marble” breaking through the “glass layer” is diminishing, and the upward force may be nearing exhaustion.

02 Types of Divergence Explained

Divergence patterns are not a single concept but a complex system with various types. Based on the strength and manifestation, they can be mainly divided into strong divergence, medium divergence, weak divergence, and hidden divergence.

Strong divergence is the most reliable reversal signal, occurring when the price makes a new high but the indicator fails to confirm, or the price hits a new low while the indicator moves higher.

For example, in a bull market, if Bitcoin reaches a new high but RSI forms a lower high, this is a strong bearish divergence signal, indicating that the upward trend may be ending soon.

Medium and weak divergences have relatively lower signal strength but can still provide valuable references for traders. When the price and indicator move in the same direction but the indicator’s movement is significantly smaller than the price, these divergences form. Although they suggest a lower probability of reversal, combining them with other technical tools can still yield effective trading clues.

Hidden divergence differs from the first three types; it mainly serves as a trend continuation signal rather than a reversal signal.

In an uptrend, if the price forms a higher low while the indicator forms a lower low, this bullish hidden divergence suggests the uptrend may continue.

Conversely, in a downtrend, if the price forms a lower high while the indicator forms a higher high, this bearish hidden divergence indicates the downtrend may persist.

03 Examples of Divergence in the Crypto Market

Divergence phenomena are particularly evident in the current crypto market. Take Bitcoin as an example: despite several bullish catalysts, its performance significantly underperformed the stock market.

Over the past month, Bitcoin has fallen more than 20%, while the S&P 500 index declined only 2.5%, and the Nasdaq dropped 4%. This macro-level divergence has sparked intense debate about future trends.

Market observers have formed two starkly different views on Bitcoin’s future. On one hand, some analysts believe the current rebound could turn into a reversal, and the bull market is still ongoing.

They point out that the loss ratio among long-term holders (LTH) is approaching historical lows, indicating selling pressure is weakening; meanwhile, the profit-loss ratio among short-term holders (STH) is converging, showing demand is rebounding.

On the other hand, some believe this is merely the second distribution phase in a downtrend, and the bear market could deepen further. Analysts holding this view note that the technical patterns in the US stock market have completed their distribution phase, making it difficult for Bitcoin to move independently higher.

Meanwhile, a clear divergence has also emerged between institutional investors and retail traders. Data from Polymarket shows that retail traders believe the probability of Bitcoin reaching $150,000 by 2026 is only 25%, while many institutional forecasts place the price range between $110,000 and $250,000.

This divergence highlights the differing perceptions of long-term value among market participants.

04 Practical Tips for Identifying Divergence

To effectively identify divergence patterns in actual trading, it is essential to master specific technical tools and observation methods. The three most commonly used indicators are RSI, MACD, and stochastic oscillators.

For example, the MACD consists of two lines: the DIF line (difference between short-term EMA and long-term EMA) and the DEA line (the moving average of DIF). When the price hits a new high but the MACD histogram fails to rise correspondingly or even declines, divergence may be forming.

Key steps to identify divergence include: first, mark significant highs or lows on the price chart; second, mark the corresponding highs or lows on the technical indicator chart for the same period; finally, compare whether they are synchronized. If the price makes a new high but the indicator’s high point decreases, or the price makes a new low but the indicator’s low point rises, divergence may be present.

It is important to note that divergence analysis should be combined with multiple timeframes. For example, if a divergence signal is found on the daily chart, confirmation can be sought on the 4-hour or 1-hour charts.

This multi-timeframe analysis can improve the reliability of trading signals and avoid potential misleading signals from a single timeframe.

Volume is an important auxiliary tool to confirm divergence signals. When a bullish divergence occurs with increasing volume, the reversal signal is more reliable; conversely, when a bearish divergence occurs with expanding volume, the likelihood of a decline increases.

05 Application of Trading Strategies

Identifying divergence is only the first step; transforming it into an effective trading strategy is the key. Different types of divergence require different trading approaches. When strong divergence signals appear, traders can consider contrarian actions—for example, reducing positions or opening short positions during bearish divergence, and gradually building long positions during bullish divergence.

Taking Bitcoin on Gate exchange as an example: if Bitcoin rises from $80,000 to $90,000, but RSI drops from 70 to 65, forming a bearish divergence with decreasing highs, this may indicate weakening upward momentum and could be a signal to take partial profits.

Hidden divergence is suitable for trend-following strategies. When a bullish hidden divergence appears in an uptrend, it indicates the trend may continue, and traders can hold or add to their positions.

Similarly, in a downtrend, a bearish hidden divergence suggests ongoing downward momentum, and short positions can be maintained.

Risk management is an indispensable part of divergence trading. Even when strong divergence signals appear, reasonable stop-loss levels should be set. Typically, stop-loss can be placed outside the key price points where divergence is identified.

For example, in a bearish divergence trade, the stop-loss can be set above the recent high; in a bullish divergence trade, below the recent low.

Future Outlook

Bollinger Bands are squeezed to the extreme, Bitcoin’s volatility has dropped to multi-month lows, and the market is quietly brewing a storm. Beneath this calm surface, the divergence between institutional investors and retail traders is widening, forming a unique divergence landscape in the crypto market.

Technical indicator divergence signals flicker from time to time, reminding savvy traders: while most are debating bullish or bearish directions, the price charts have already subtly revealed clues about the future trend.