Hidden Bullish and Stock Indices Hidden Bearish Divergence Stock Indices

Hidden divergence is used as a possible sign for a stock indices trend continuation after the stock index price has retraced. It is a signal that the original stock indices trend is resuming. This is the best setup to trade because it is in the same direction as that of the continuing market trend.

Stock Indices Hidden Bullish Divergence

This setup happens when stock index price is making a higher low (HL), but the oscillator (indicator) is showing a lower low (LL). To remember them easily think of them as W-shapes on Chart patterns. It occurs when there is a retracement in an upward stock index trend.

The example illustrated below shows an image of this stock indices setup, from the screenshot the stock index price made a higher low (HL) but the indicator made a lower low (LL), this shows that there was a diverging signal between the stock index price and indicator. This signal shows that soon the stock indices market up stock indices trend is going to resume. In other words it shows this was just a retracement in an upward stock indices trend.

This confirms that a retracement move is complete and indicates underlying strength of an upward stock index trend.

Stock Indices Hidden Bearish Divergence

This setup happens when stock index price is making a lower high (LH), but the oscillator is showing a higher high (HH). To remember them easily think of them as M-shapes on Chart patterns. It occurs when there is a retracement in a downward stock index trend.

The example illustrated below shows an image of this stock indices setup, from the screenshot the stock index price made a lower high (LH) but the indicator made a higher high (HH), this shows that there was a divergence between the stock index price and the indicator. This shows that soon the stock indices market down stock indices trend is going to resume. In other words it shows this was just a retracement in a downward trend.

This confirms that a retracement move is complete and indicates underlying strength of a downward stock index trend.

Other popular indicators used are CCI indicator (Commodity Channel Index), Stochastic Oscillator, RSI and MACD. MACD and RSI are the best indicators.

NB: Hidden divergence is the best type to trade because it gives a signal that is in the same direction with the current market trend, thus it has a high reward to risk ratio. It provides for the best possible entry.

However, a stock indices trader should combine this stock indices setup with another indicator like the stochastic oscillator or moving average and buy when the stock indices instrument is oversold, and sell when the stock indices instrument is overbought.

Combining Hidden Divergence with Moving Average Crossover Method

A good indicator to combine these stock indices setups is the moving average indicator using the moving average crossover method. This will create a good trading strategy.

Moving Average Crossover Method

In this strategy, once the signal is given, a stock indices trader will then wait for the moving average crossover method to give a buy/sell stock indices signal in the same direction, if there is a bullish divergence setup between the stock index price and indicator, wait for the moving average crossover system to give an upward crossover signal, while for a bearish diverging setup wait for the moving average crossover system to give a downward bearish crossover signal.

By combining this stock indices signal with other indicators this way one will avoid whipsaws when it comes to trading this stock indices signal.

Combining with Fibonacci Retracement Levels

For this example we shall use an upward market trend. We shall use the MACD indicator.

Because the hidden divergence is just a retracement in an upward stock indices trend we can combine this stock indices signal with the most popular retracement tool that is the Fibonacci retracement levels. The example illustrated below shows that when this stock indices setup appeared on the chart, the stock index price had just hit the 38.2% level. When stock index price tested this level, this would have been a good level to place a buy order.

Combining with Fibonacci Expansion Levels

In the stock indices example above once the buy stock indices trade was placed, a stock indices trader would then need to calculate where to take profit for this trade. To do this one would need to use the Fibonacci Expansion Levels.

The Fibonacci expansion was drawn as shown on the chart as shown below.

For this example there were three take profit levels:

Expansion Level 61.8% - 131 pips profit

Expansion Level 100.0% - 212 pips profit

Expansion Level 161.8% - 337 pips profit

From this strategy combined with Fibonacci would have provided a good strategy with a good amount of profit set using these take profit levels.