My favorite technical indicator is the bullish / bearish divergence, which I would recommend to identify entry and exit signals to complement fundamental analysis.
I'm a value investor who hunts for oversold stocks and avoids overbought ones. After performing due diligence and pinning down a specific stock whose fundamentals are strong despite being oversold, I would look out for bullish divergence as a buy signal in order to time my entry, rather than rush into accumulating the shares right away, as markets can stay irrational longer than we can stay solvent, in the wise words of the famed economist John Maynard Keynes.
A divergence occurs when the stock price moves in opposite direction to a momentum indicator, such as the relative strength index RSI, which is a technical indicator of the strength or weakness of a stock based on its recent price movements.
A bullish divergence is established when the share price drops to lower lows while the RSI forms higher lows. This could be a sign that the bears are losing control whereas the bulls are gaining domination, signaling light at the end of the tunnel as the stock price regains strength.
If I'm able to identify such a bullish divergence pattern, I'll be able to catch the wave early and acquire the shares, before others jump onto the bandwagon and push up the share price.
On the other hand, if a stock is being overbought, especially on herd mentality and fear of missing out, despite no substantial improvement in the stock fundamentals, it may be due for a correction soon and I would like to be able identify the exit signal such as a bearish divergence to sell before others rush for the exit when market panic set in.
A bearish divergence pattern shows up when the share price is chased up to higher highs but the RSI is losing steam and forming lower highs. The signal is a prediction that the bulls are losing control to the bears, marking the end of the stock price uptrend soon before rapid price decline.
While the divergences are predictions of stock price reversals, they can turn out to be false signals when divergence patterns are formed, but yet reversals do not materialize. Hence, like other technical indicators, divergences can be useful guides, but I would not rely on them alone, as technical analysis works best with rather than replaces fundamental analysis, and it would be prudent to reinforce my analysis with other technical indicators at the same time.
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