Although divergence is not an indicator as it is not a mathematical construct, it is often said to be a leading indicator, and hence its inclusion while taking the decision to buy Punjab National Bank.
What is hidden divergence?
Divergence refers to the difference in movement between an oscillating indicator, such as MACD, CCI, RSI, Stochastic, etc., 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 and that the trend will resume. In other words, hidden divergence is akin to a continuation pattern. As with regular divergence, hidden divergence can be bullish or bearish.
This indicates that there is still strength in the uptrend and that the correction is merely profit-taking rather than the emergence of strong selling and is thus unlikely to last long. Thus, the uptrend can be expected to resume.
Why to Buy Punjab National Bank (PNB)?
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, it is often said to be a leading indicator; hence, its inclusion while taking the decision to buy Punjab National Bank. Divergences not only signal a potential trend reversal, but they can also be used as a possible sign for a trend continuation (price continues to move in its current direction).Recently, PNB registered a swing top around 38 mark and traded lower towards Rs 32. While correcting, it has gone through the crucial setup of a higher low in price whereas lower low in stochastic forming hidden positive divergence in an oscillator which is shown on the chart. Pin bar candle followed by bullish candle is also giving confirmation of price reversal in the last 2-3 trading sessions. Moreover, 50 DMA is providing strong support near Rs 32 levels. Above mentioned rationale supports bullish price action ahead and buying this stock will yield in profit.
Figure.1. Divergence and Buy signal on PNB
As per one of the methods of support and resistance previous swing standing around Rs 38 should provide immediate resistance on higher side, moving further to Rs 42 will attract more profit bookings. So one can consider profit booking near Rs 38 and higher towards Rs 42 mark.
Entire bullish view negates on a breach of immediate support zone and in the case of PNB, we will consider Rs 30 as a stop loss level.
We recommend buying Punjab National Bank around Rs 33 with a stop loss of Rs 30 for higher targets of Rs 38/42 as indicated in above chart.
The author is Head - Technical Research at Narnolia Financial Advisors Ltd.
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