What is Hidden divergence?
Divergence refers to the difference in movement between an oscillating indicator, such as MACD, CCI, RSI and Stochastic and the price action of the underlying financial instrument. Hidden divergence occurs when the oscillator makes a higher high of lower low, while the price action does not. This often tends to occur during consolidation or corrections within an existing trend and usually indicates that there is still strength in the prevailing trend. In other words, hidden divergence is akin to a continuation pattern.
Why buy Bharat Petroleum Corporation ?
Oscillators are most beneficial when a security is in a horizontal trading pattern. Oscillators move higher and lower between extreme reading that determine overbought or oversold conditions. These overbought or oversold conditions indicate probable turning points in price movement and can be used as potential entry or exit points.
Although divergence is not an indicator in that it is not a mathematical construct but its a strong leading indicator. Recently BPCL registered a swing top around Rs 428 mark and thereafter traded lower towards Rs 375. While correcting, it has gone through the crucial setup of higher low in price, whereas lower low in stochastic, forming hidden positive divergence in an oscillator that is shown in the chart.Bullish Belt Hold candle followed by higher high is also giving confirmation of price reversal in the last two trading sessions. Moreover, rising trend line is providing strong support near Rs 370 levels. The abovementioned rationale supports bullish price action and buying this stock will yield in profit.
Figure.1. Divergence and Buy signal on BPCL
As per one of the methods of support and resistance, the previous swing standing around Rs 430 should provide immediate resistance on the higher side, moving further Rs 460 will attract more profit bookings. So, one can consider profit-booking near Rs 430 and higher towards the Rs 460 mark.
The entire bullish view negates on a breach of immediate support zone and in the case of BPCL, we will consider Rs 355 as a stop loss level.
We recommend buying Bharat Petroleum Corporation (BPCL) around Rs 382 with a stop loss of Rs 355 for higher targets of Rs 430-460 as indicated in the above chart.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not thoseof the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.