In technical analysis a divergence pattern is a signal on a chart that occurs when the price of an asset is moving differently than a technical indicator. A divergence can show that the chart is becoming bullish and the chart may be beginning an upswing or uptrend in price action.
What is a Hidden Bullish Divergence?
A hidden bullish divergence happens in an uptrend when the price of an asset makes a higher low while the oscillator is making a lower low. This is seen as price action signaling the chart is showing upside potential as it diverges from the technical indicator’s new low. Price is growing stronger as the technical indicator’s reading is going lower.
The RSI or MACD can be used as one way to filter price action and momentum but they can also be used in comparison with price as you look at the direction of the indicators momentum versus the trend in price action. The divergence between the technical indicator and the price movement can signal a reversal of a downtrend or downswing or a continuation in an uptrend or upswing in price depending on the starting point. A hidden divergence can also signal that a chart in a downtrend may begin to go sideways.
Hidden Bullish Divergence RSI
Technical oscillators used to identify bullish divergences include the popular Relative Strength Index (RSI). The RSI not only measures the extremes of overbought (70) or oversold (30) but can also show divergences between it making lower lows and price not making lower lows. A 30-RSI reading on a chart that happens as price makes a higher low can be a high probability dip buy signal.
Hidden Bullish Divergence MACD
The Moving Average Convergence-Divergence (MACD) is another technical indicator that can be used to identify a bullish divergence on a chart. The MACD can not only signal bullish or bearish crosses but also its divergence in relation to price action can show price momentum. When the MACD makes a new low and price doesn’t this can show strength in the price action versus the MACD.
Trading a Bullish Divergence
A bullish divergence is a valid technical signal to go long using technical analysis. Of course it is just a high probability signal, it doesn’t always work so proper position sizing is still required and stop losses must be used to prevent big losses if the momentum fails. Also the profitability is not in the entry it is in the exit so it is crucial to have a strategy in place for how you will both maximize and eventually lock in profits when it does work out in your favor.
Image Source: TheBirbNest.com