Just as classic divergence does not appear on every price chart, so it is with hidden divergence. But when they do appear, they are worthy of atenton

low at point 2 than it had at point 1. In May, at point 4, the

indicator was lower than at point 3, but the price low at point

4 made a double bottom with the price low at point 3 before

price resumed its advance. As the indicator made lower lows

in July and August at points 6 and 7 than it had at point 5, price

continued to make higher lows. Another double-bottom price

low occurred at points 8 and 9, but the indicator made a lower

low at point 9, signaling the potential for additional strength.

The year 1995 also produced a strong bull market in the

grains. December corn made a $3,000 runup in price during a

five-month period (Figure 3). Classic bullish divergence was

not evident at the August price double-bottom retest of the July

lows, but hidden divergence was very much in evidence as the

indicator made a lower low at point 2 that was not confirmed

by lower prices. Point 3 represents a confirmation rather than

an HD because both price and oscillator dipped approximately

at the same time.

The next HD occurred at point 5. In October, the oscillator

at point 5 was lower than it had been at 4, yet the price low was

higher than it had been at either points 3 or 4. This was another

place to enter or buy more contracts. Traders would have seen

the bearish classic divergence in September and October as

price continued to make new highs, while the indicator made

lower highs. Some would have thought the move was over, but

those who exited might have spotted the HD re-entry opportunity

at point 7 when the indicator was well below point 5 and

the price low was higher than it had been at point 5, suggesting

a price rally.

The “X” at point 6 in Figure 3 calls attention to a variation

that I call the second-point lookback, which can be used when

looking for hidden divergences. Most of the time, the HD will

occur between the last two indicator lows such as those

between points 4 and 5. Sometimes, though, it is important to

look at the low made two indicator points ago. In this case, the

indicator low at point 7 was lower than the indicator low at 6

— the preceding indicator low — but then so was the price

low. That produced a confirmation with price and would

appear to negate the pattern. However, a look back to the

indicator low at point 6 showed that it was higher than point 5

and that point 7 was lower than both points 5 and 6 and that the

price low was higher at both points 6 and point 7 in relation to

point 5. Many times, this indicates either a resumption of the

up move or a rally to retest the top.