In stock trading, hidden divergence is a technical analysis concept where the price of an asset makes a higher low (in an uptrend) or a lower high (in a downtrend), while the corresponding indicator (like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD)) shows the opposite behavior.
Key Points:
Hidden Bullish Divergence
Occurs during an uptrend and signals potential continuation of the trend.
The price makes a higher low, but the indicator makes a lower low.
This suggests that even though the momentum indicator shows weakness, the underlying trend remains strong, and prices may continue to rise.
Hidden Bearish Divergence
Occurs during a downtrend and signals potential continuation of the trend.
The price makes a lower high, but the indicator makes a higher high.
This suggests that despite the indicator showing strength, the trend is likely to continue downward.
Example:
In an uptrend:
Price: Higher Low (HL)
Indicator: Lower Low (LL)
Signal: Hidden Bullish Divergence – the trend is likely to continue upwards.
In a downtrend:
Price: Lower High (LH)
Indicator: Higher High (HH)
Signal: Hidden Bearish Divergence – the trend is likely to continue downwards.
Why it Matters:
Hidden divergence is primarily a continuation signal, meaning it suggests the existing trend is likely to persist. Traders use it to confirm their positions or decide to stay in a trade longer. It complements regular divergence, which is often seen as a reversal signal.
Tools for Spotting Hidden Divergence:
Oscillators like RSI, MACD, and Stochastic Oscillator.
Use chart patterns and trendlines alongside these indicators for confirmation.
HAPPY TRADING!