EXPERIMENT WITH YOUR FAVORITES

There is nothing magical about the 5-15 price oscillator;

hidden divergences appear on many indicators. Figures 7 and

8 illustrate HDs on the June 1996 bond chart using Williams’

%R† and momentum† indicators, both of which can be found

on most charting software. Different indicators will display

HDs at different places on the price chart, and some indicators

may produce more hidden divergences than others.

The 14-unit Williams’ %R exhibited bullish hidden divergence

at the indicator double bottom at points 1 and 2 as price

made higher lows at each of those points. Other bullish HDs

occurred at points 2 and 3, 3 and 4, 4 and 5 and points 7 and 9.

An indication of a trend reversal appeared at point 10 when %R

made a higher high than it had at either points 6 or 8, but the

price high at point 10 was lower than at points 6 and 8. Price

support at point 9 was broken to the downside following the

bearish HD. The decline continued following another bearish

HD at point 12.

Both bullish and bearish HDs occurred at similar places on

the price chart using a 12-unit momentum indicator on the

same bond chart. (The 12-unit momentum indicator is the

default level on MetaStock software.) Despite bearish classic

divergence at points A, B and C on the momentum indicator as

price moved up above the 120 level during the last four months

of 1995, bullish HDs were evident between points 1 and 2, 2

and 3, 3and 5, and 5 and 7. The first sign of a bearish HD came

in January, when point 6 on the indicator double topped with

point 4 as price made a lower high at point 6. The trend change

was confirmed when price broke support at points 5 and 7. The

second bearish HD occurred at points 8 and 9, which was

followed by a swift five-point decline.

Just as classic divergence does not appear on every price

chart, so it is with hidden divergence. But when HDs do appear,

they are worthy of attention, as they can add to your profit

potential by keeping you on the right side of a trend or by

confirming a trend change. The trick is to train your eye to

recognize a hidden divergence when it presents itself. Now that

you know what to look for, see if you can spot them on the

indicators you like to use.