Divergence Analysis
Figure 9.92 No Signal Alternation between Expanding and Contracting Formations.Figure 9.93 No Signal Alternation between Contracting and Expanding Formations.9.6.1.1 examples of inter Market Divergence The main challenge when at-
tempting to identify divergence between stocks, commodities, and various indices is
to determine which instrument would best represent the main data series. It behooves
the analyst to refer to the momentum principle, described in section 9.3.6, as a guide
to determining the most appropriate choice for the main data series. The momen-
tum principle states that the main data series is expected to follow through in the
direction of the supporting data series, as far as standard divergence is concerned.
Therefore, based on a similar rationale, the task is to identify the stock, commodity,
or index that leads the one under observation. In short, the leading instrument will
represent the supporting data series, and the instrument or market under observa-
tion in the main data series is expected to follow through in the direction of the
leading market or instrument. As for the application of reverse divergence analysis,
we shall resort to either the contrarian or chronological approach and expect a con-
tinuation in price in main data series.