Hidden bullish divergence is something a position trader craves. It helps us spot ideal moments to enter a stock before the reversal happens and maximizes profit potential. As any trader who has been around will tell you, being early is very important to give you that breathing room to stomach the inevitable pull backs. Waiting for a strong reversal signal when you’re witnessing bullish divergence is key to success using FlowTrade. They stress confluence and I agree.
What we can see certainly is “hidden” from the eyes of most retail traders. Which leads me to a little bit of friendly advice which should be heeded by new traders:
Never, ever buy shares or options on anything without multiple reasons to enter long. An indicator moving up is simply not enough. We need price action, sentiment, volume, algo indicator, big block or dark pool trades, patterns. The more signals the merrier.
Lets take a look a recent example: $GOOGL has hidden bullish divergence from an algorithmic HFT perspective. Big money institutions use HFTs to place orders in fractions of a second. These are the big sharks of the ocean, and tracking their movements (as best we can) is extremely helpful.
Fig 1 above shows algos aggressively taking a position as far back as 12/4 with a large up tick in activity on 12/17-12/18. We are seeing the hidden bullish hand of market makers in action. You’d NEVER know this by looking at the price action alone. No other indicator exists like it. So, we see hidden divergence, but when should we enter? First lets look at several things…
What is The Daily trend? Bullish or Bearish?
You should be running down a checklist before making a trade, hidden bullish divergence or not. Currently $GOOGL daily chart is in a large rising wedge formation. The long term trend is up. Have a look at Fig 2 below:
We are using no indicators on this chart, just simple heikin ashi candles. For me, a rising wedge like this is a bullish trade, as long as it bounces off the bottom line when it comes in contact. Because we don’t know the exact dollar amount that will be, we need to watch for where and when this happens. You can even set an alert for when the trend line is touched using tradingview or trendspider (two of the best browser based charting platforms imo)
Hidden Bullish Divergence on 4HR Charts
Now lets take a look at some shorter term opportunities. We don’t HAVE to wait for the daily chart to hit the trend line, do we? As long as we are willing to take profit sooner…When using the FlowTrade charts to spot divergence, we should line them up with our own technical charts. For example the chart below (Fig 3) shows a 4hr short term falling wedge, and the hull ribbon shows a buy signal. Also we see that there is some hidden bullish divergence as the Williams R% shows a nice bounce from -80 heading back to the middle line near -40.
Now lets take a look a bit closer at the 15 minute below (Fig 4)
The falling wedge drawn from a 4hr viewed on a 15 minute chart. It suggests there might be a short term long trade on a pull back, if we get the right conditions (Overall market melt up).
Also if we look at Fig 5 below, we see the reason for a bounce (a test of the 50 EMA on the daily time frame). We need confluence here with what we are seeing on our algo charts to have confidence to buy.
Hidden Bullish Divergence Revealed Algorithmically
Finally we have the big picture, and we see that there is an opportunity brewing for a long trade, provided we hold the 50EMA. If we do not hold it, I’ll wait to enter a lower daily moving average. I’ll be watching the 1 and 15 minute charts daily/weekly on FlowTrade (these are the only two time frames we have).
What will be ideal is seeing a new block trade, or dark pool trade as well as algos moving up with price, on both 1 and 15 min charts. When this happens, we’ll see it happen in real time and be prepared because we’ll know plenty of time in advance if the algos and dark pools were buying or not, which lends a lot of confidence to the trade.
On the down side with hidden bullish divergence, there is the risk that the algos will buy the dip but the stock price will not follow until the price hits a lower trend line (the main rising wedge on the daily Fig 2 perhaps) or it wants a lower moving average. Because they are dealing in shares, and not calls or puts, they can continue to average into a position knowing that they will get higher prices down the road. As I have said before, knowing the timeline of their plan is impossible, but we can see what they are doing, when they are doing it, which is good enough to make a more confident trade.
Thanks for reading, make sure you read my first post about understanding dark pool charts too. See you on the next post. – darkpoolcharts