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Hidden divergence

A divergence read as trend continuation rather than reversal: price makes a higher low while the oscillator makes a lower low.

Regular divergence compares extremes at the ends of a move and suggests exhaustion. Hidden divergence compares pullback points inside a trend: price holds up better than momentum did, which is read as underlying strength.

In an uptrend the pattern is a higher low in price against a lower low in rsi; in a downtrend, a lower high in price against a higher high in the oscillator. It is used as a pullback entry filter rather than as a reversal call.

Be aware of how easy it is to find. With several oscillators, several lookbacks and freedom to choose which swing points to compare, some form of divergence exists almost always. Fix the oscillator, the setting and the swing definition in advance, or you are just drawing lines to fit a conclusion.

Related: divergence, rsi, pullback, macd-histogram, overfitting

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bearish divergence between price and RSIA price line whose second peak is higher than its first, drawn above an RSI panel whose second peak is lower than its first, with the two peaks joined by sloping dashed lines.PRICEhigher highRSI (14)70overbought30oversoldlower high
Divergence between price and RSI. RSI measures how one-sided recent price moves have been on a 0–100 scale. Here price sets a higher peak while RSI sets a lower one, so the second push carried less momentum than the first.
Trend structure: higher highs against lower lowsTwo zigzag price paths side by side; the left one steps upward with each peak and trough above the last, the right one steps downward with each peak and trough below the last.UPTRENDhigher highs, higher lowsHHHHHHHLHLHLDOWNTRENDlower highs, lower lowsLHLHLHLLLLLLHH higher high, HL higher low, LH lower high, LL lower low.
How a trend is built. A trend is just a sequence of turning points. While each peak and each dip sits above the one before it the market is trending up; once both start landing below the previous ones the structure has turned down.

Educational only, not advice. Spotted an error? Post in Site Feedback.