A hidden bullish divergence on MACD is a technical analysis pattern that indicates a potential bullish reversal in the price of an asset. It occurs when the price of the asset makes a lower low, but the MACD indicator makes a higher low. This divergence suggests that buying pressure is increasing, even though the price is declining.
How to Identify a Hidden Bullish Divergence on MACD:
- Price makes a lower low: The price of the asset creates a new low that is lower than the previous low.
- MACD makes a higher low: The MACD indicator creates a new low that is higher than the previous low.
- Divergence: The divergence occurs because the MACD indicator is making higher lows while the price is making lower lows.
Interpretation of a Hidden Bullish Divergence:
- Bullish signal: A hidden bullish divergence is a bullish signal that suggests a potential reversal in the price of the asset.
- Increased buying pressure: The divergence indicates that buying pressure is increasing, even though the price is declining.
- Confirmation: It's important to note that a hidden bullish divergence is not a guarantee of a price reversal. It should be used in conjunction with other technical indicators and fundamental analysis to confirm a bullish signal.
Example:
Imagine a stock's price is declining, making lower lows. However, the MACD indicator is making higher lows. This divergence suggests that buying pressure is increasing, even though the price is declining. This could signal a potential bullish reversal in the price of the stock.
Practical Insights:
- Entry point: Traders may use a hidden bullish divergence as a potential entry point for a long position.
- Risk management: It's important to use appropriate risk management techniques when trading based on a hidden bullish divergence.
- Confirmation: It's important to look for confirmation from other technical indicators and fundamental analysis before taking a trading position.
