Regular vs. Hidden Divergence

I realized today that unbeknownst to me, regular divergence and hidden divergence are absolutely and totally different beasts.  In fact, I'm not even sure if I knew about hidden divergence.  What this means is that I may have been classifying regular divergence as hidden divergence and vice versa.  This is my mistake, one in which I don't want you to make too.  So I am going to reference some material to give an overview of both types.

Divergence happens when price makes one pattern and a corresponding indicator makes the opposite pattern.   You can use any indicator but the most commonly used are RSI, MACD, CCI, or Momentum.  I'm going to go through the process of identifying 4 types of divergence.

The first type is Regular Bullish Divergence.

Characteristics:  

  • Occurs in a downtrend
  • Possibly signals the end of a downtrend
  • Possible bullish correction
  • Lower lows in price
  • High lows in indicator

#1
sp32-20060804-203945

 

 

 

 

 


The second type is Regular Bearish Divergence.

Characteristics:

  • Occurs in an uptrend
  • Possibly signals the end of an uptrend
  • Possible bearish correction
  • Higher highs in price
  • Lower highs in indicator

#2sp32-20060804-204518

 

 

 

 

 
 


The third type is Bullish Hidden Divergence.  

I would have simply called this next type of divergence regular bearish divergence in the past and I would have also expected it to have the regular bearish divergence characteristics above.  Let's first look at a chart of Bullish Hidden Divergence.

#3hidden bullish divergence

 

 

 

 

 

As you can see, the price continues its ascent because Bullish Hidden Divergence is a continuation pattern.  You have to look closely but look at the MACD in the chart #3 above as opposed to the MACD in chart #2.  In chart #3, the price is making higher highs and the indicator is making lower lows and the MACD in chart #3 IS ALREADY IN OVERSOLD TERRITORY.  This is quite different than chart #2 as MACD is still in positive territory.   

Characteristics:

  • Trend continuation
  • Higher highs in price
  • Lower lows in indicator

The fourth type is Bearish Hidden Divergence.

This too is a continuation pattern as the bearish trend is expected to continue.

#4Bearish Hidden Divergence

 

 

 

 

 

You also have to look closely at the MACD in chart #4 above.  The MACD is already in overbought territory and the indicator is making higher highs.

Characteristics:

  • Trend continuation
  • Lower highs in price
  • Higher highs in indicator

This isn't the easiest thing to explain.  Just look closely at the four charts above and the four different types of divergences shouldn't be hard to see.

Comments

2 Responses to “Regular vs. Hidden Divergence”

  1. Forex Trader on December 15th, 2007 3:25 pm

    After reading an ebook about hidden divergences this examples helped me to understand the concepts. But i think there is a small error in the characteristics of bullish HD, where it says higher highs in price it should say higher lows, because price can show a doble top without higher high and a hidden divergence could still appear in the indicator

  2. Forex Trader on December 15th, 2007 3:46 pm

    Yes, you’re right. Check out my divergence chart where it is correct. http://www.forexproject.com/technical_analysis/divergence.html

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