Wednesday, June 12, 2013

Hidden divergence in nzd/usd pair



Hidden divergence is a term of technical analysis. A regular divergence (in a range) usually means that prices will reverse soon. If a security has been climbing for some time and makes a new high and some technical indicator, let’s say RSI shows lower high it is a divergence of price and indicator. It means the move is losing momentum and prices will probably reverse soon. Now, hidden divergence is usually used in counter trend moves and it signals that a rally (counter trend move) is about to end and the original trend will resume itself.

This kind of divergence can be seen on nzd/usd 4 hour chart (with RSI indicator). You can see that an indicator is showing higher highs and the price has not reached the highs yet (and probably won’t reach it and reverse). On the 6th of June nzd/usd was at 0.8101 (the most recent peak), RSI was at about 51.11. Now, the pair reached 0.8022 and RSI reached 54.44. So, the price made lower high and RSI made higher high. This is hidden divergence. From technical perspective the price should fall now. Of course, we have fundamentals coming out today, but will it be able to change current downtrend in nzd/usd remains to be seen.