Simple's Green Room

[pennies2007]

Trading Hidden Divergence

Ahhh...I was wondering when someone was going to get around to asking about that.

That little maneuver Qui was due to the ability to recognize not only regular divergence but also hidden divergence.

In this case, GU has developed a new downtrend. So bounces are expected during the process since the larger original trend was up. So the market typically tries to take GU back up during the sell off.

In this case, I looked back on the chart to where GU made a significant low area. Then I just sat back and watched as it attempted over and over again to break above it. It failed repeatedly. Then we made a new significant low with a sharp rally that followed.

Now normally you would be thinking that we have some type of great entry point to go long, right? But what you have to remember is that when those big candles appear on the chart, price action absolutely HAS to go back an square up those big moves at some point with a retrace. That's true on any time frame.

So I had a resistance point marked with repeated failures. Then I got to noticing the price action after that. See where the big spike candle entered the picture? That is the market's attempt to bleed off some of the oversold condition that existed on the hourly chart at the time. Perfectly normal. Now take note of the level on the TDI peak.

Now look at what happened to price action afterwards. It dropped back and came back up to make a slightly lower high before selling off again. Now look at the TDI again...it made a higher peak. So we had a higher TDI peak but a lower high on price action.

Then GU backed off and made another stab upwards. The TDI made a high peak again...but the price was even lower. Price action started consolidating in that area. That's where I took the initial short.

During a downtrend, when price action makes lower highs but the TDI makes higher highs, that's HIDDEN bearish divergence. It indicates that the market is allowing the oversold conditions to bleed off so that it can store up energy for another push down.

That also happened to be where the hourly EMA62 was sitting as resistance. One other thing I noted that I didn't have on that chart was the fact that the hourly mid bollie was BELOW the EMA62...bearish condition.

So I had hidden bearish divergence along with strong resistance at the hourly EMA62 during a downtrend.

I also went the extra mile and added another GU short just above 1.55 this morning as price tried to rise one more time to the 23.6 fib to test it as resistance. That coincided with a retest of the hourly mid bollie from underneath AFTER price action had already dropped and started closing candles well beneath the mid bollie.

The concept of hidden divergence is a bit harder to grasp at first but once you learn to recognize it, it's invaluable in trading.

Put it all together and you have a recipe for a sell off.

GU Hourly Chart...