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The "Hidden Divergence" or "Set-up"
The "set-up" signal (also called "Hidden Divergence") is a very reliable and
powerful, yet often overlooked signal given by the Stochastic Oscillator as
well as other price Oscillators such as RSI etc..
The daily Coffee chart below shows many "Set-ups" or "Hidden divergences".
The swing higher at point B is much lower than the swing at point A, however
Stochastics shows a much higher peak at point B than at point A. After the
low at point C the market rallied and then pulled back to make a higher low
at point D, the low at D on Stochastics was much lower at point D than it
was at point A, this is a very good Bull set-up signal (Hidden divergence).
This type of divergence signal is different than the traditional divergence
shown at lines "a" and "b" in which the market makes a higher high and
Stochastics makes a lower high and is somewhat illogical.
After the market sold off after the "normal divergence" signal as prices
crossed both 18 and 40 day Moving averages and it appeared that the trend
may have changed ? however, at point E the prices were higher than at point
D, but Stochastics were lower at E than they were at D, giving a Bull set-up
signal. A second set-up signal was given at point G which was higher in
price than F but Stochastics made a lower low G than F.General assumption is
that normal divergence appears at tops and bottoms and is generally "against
the trend"while hidden divergence occurs at entry points that would be
considered trading "with the trend"Andrew Cardwell (RSI) calls these setups
"positive & negative reversals" and teaches thatpositive reversals (bullish
hidden divergence) only occurs in uptrendsand negative reversals (bearish
hidden divergence) only occur in downtrends.........while I dont agree with
that 100%, I do think that this form of divergence is the most reliableand
offers the better trade setups
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