When J.Welles Wilder Jr. published the book, New Concepts in Technical Trading System in 1978, he gave the world powerful tool to identify momentum and momentum shifts in a stock. However, back then Wilder was hugely focused on reversals as most of his teachings consist of overbought and oversold levels and, failed RSI swings.
The script, though, flipped in late 1980s after Andrew Cardwell observations.
Andrew Cardwell, a legendary technician and a mentor to many institutional traders, noticed that in strong bull markets, The RSI often dropped sharply while price barely budged. He further observed that this was not a sign of weakness but rather "hidden strength". He termed these setups as "Positive reversals".
Similarly, Cardwell observed that in strong bear markets, the RSI sometimes rose sharply without a sharp rise in price. He further noticed that this sign was not a sign of bear weakness but rather a strength within the trend. He called these setups as "negative reversals".
Later on Barbara Star, popularized these setups as "Hidden Divergences" in her essays in the magazine Technical Analysis of Stocks and Commodities.
Today we will learn about these setups in detail. Let's begin.
What is Hidden RSI divergence?
A Hidden RSI divergence is a trend continuation signal, unlike regular RSI divergences which signal reversals. Many analyst term it as momentum reset, a market's way of recharging the batteries without any change in market trend. Hidden divergence thus signify that the prevailing trend will continue in its original direction.
Hidden RSI divergence is of two types-
- Bullish hidden RSI divergence
- Bearish hidden RSI divergence
Let's understand this one by one.
A Bullish Hidden RSI divergence occurs in an uptrend when price makes a higher low but RSI makes a lower low. This tells that inspite of loss of considerable momentum (RSI making a lower low), the price didn't budge much and made a higher low. The sell orders were absorbed without considerable fall in price signaling strength of buyers.
The image below shows the bullish hidden divergence.
Conversely, a Bearish Hidden RSI divergence occurs in an established downtrend when price makes a lower high but RSI makes higher high. This suggests though there was considerable momentum gain (RSI making a higher high) but this didn't reflect in the price. The buy orders were absorbed without much gain in price, suggesting bear's strength.
This has been shown in the image below.
How to confirm a Hidden RSI divergence?
There is only one uniform rule in technical analysis, every pattern, every strategy and every trading plan fails at times. This is why confirmation is so crucial while analyzing a stock.
So, how do you confirm a a Hidden RSI divergence?
The trend confirmation-
By definition hidden RSI divergence is a trend continuation signal. For trend to continue , a prevailing trend must be present at the first place. The trend confirmation is done through 200 EMA. An upsloping 200 EMA line with price above the MA confirms an uptrend while a down sloping 200 EMA with price below this line suggests a downtrend.
Look for a bullish hidden divergence in an uptrend and bearish hidden divergence in a downtrend. A hidden divergence in a a sideways trend is an invalid divergence.
The RSI confirmation-
The most potent Hidden Bullish divergence occur when the RSI dips into 40-50 zone. If the RSI crashes all the way down to 25-30, be careful. That isn't just a pullback, it might be a structural trend change warning. (source- StockChartSchool)
Similarly in a downtrend a valid RSI hidden divergence occur when RSI goes up to 50-60 zone. Once RSI goes all the way up to 70 or higher, it signals an RSI range shift and a possible trend change.
The 'White Space' test-
This a visual filter for the separation of divergence point. Look at the space between the two valleys. Is there a clear white space? Did the RSI cross the 50 line in between the two points. If it did, it confirms the momentum truly reset, otherwise the signal is likely a stutter in price rather than a tradable swing.
What is the difference between Hidden RSI divergence and Regular RSI divergence?
-A Hidden divergence is a continuation pattern while a regular divergence is a reversal pattern.
-You look at hidden divergences near midline that is, 40-50 in bullish hidden divergence and 50-60 in bearish hidden divergence. The regular RSI divergence occurs near extremes in overbought and oversold areas.
How to trade the Hidden RSI divergences?
Let's assume you have identified a hidden divergence and also confirmed its validity through the filters described above. How would you go ahead with the trading part.
Once again, you don't' jump into a trade just after spotting a divergence rather you wait for a confirmation signal.
In this case confirmation regarding entry comes from either price action or other indicators.
One of the ways is to wait for a bullish candlestick pattern like a Hammer or Engulfing candlesticks and enter the trade.
Other ways can be getting buy signals from other indicators after hidden divergence formation. For example a MACD crossover or a parabolic SAR buy signal.
Another way can be to wait for a buy/sell signal on a lower time frame and enter the trade accordingly.
The initial stop loss can be placed on the structural low and trail it as the trade goes into your favour. you can use ATR for trailing stop loss.
How reliable is Hidden RSI divergence?
In the world of technical analysis, data beats opinion and the data on Hidden RSI divergence is compelling to say the least.
Quantitative backtesting suggests a significant reliability gap between the two divergence types.
The regular RSI divergence has a win rate of 40-50% in trending markets as it is against the dominant trend. (Source)
When filtered correctly using 200 EMA and market structure, hidden divergences have shown win rate of 60-70% in certain studies.
A recent study in crypto market indicates that Hidden divergences are approximately 14% more reliable than regular divergence.
The Bottom line-
Hidden RSI Divergence is a reliable trend continuation signal that identifies "momentum resets," where price maintains trend structure (e.g., higher lows) while RSI diverges.
Unlike regular divergence which signals reversals, Hidden divergence aligns with the dominant trend, confirmed by the 200 EMA and specific RSI "safe zones" (40-60) rather than extremes.
The "White Space" test and secondary triggers like candlestick patterns are essential for validating entries.
By trading with the trend rather than against it, quantitative studies suggest Hidden Divergence offers a significantly higher win rate (60-70%) than standard divergence setups.
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