Divergence Analysis
But there are situations where price confirmation at the higher wave degree is
necessary, especially when it relates to forecasting the direction of the subsequent
larger trend where we require the violation of a higher peak or lower trough in
order to determine whether it is up trending or down trending.
Finally, once prices reverse and the divergent setup achieves price confir-
mation, we say that there is follow‐through of the setup. It should be obvious
by now that for any setup, follow‐through is easier to achieve at the next
lower wave degree. Therefore, in spite of overlapping areas of conflicting sig-
nals at the higher wave degree, it does not affect participatory action at the
lower wave degree as there is a high level of follow‐through from one setup
to another.9.5 Signal Alternation between Standard and Reverse Divergence
As briefly discussed in the previous section, there may be situations where stan-
dard and reverse divergence formations may overlap and even alternate in suc-
cession, resulting in what initially appears to be contradictory signals. We shall
examine 20 general scenarios where the data series trend, range, expand, and
contract with respect to each other. There are only six idealized scenarios ex-
hibiting signal alternation. We shall assume for convenience that all data series
action unfolds contiguously in a consistent manner and displays no irregular
action.9.5.1 heuristic for Determining if signal alternation
is present
We can formulate a general rule of thumb for deciding if signal alternation exists
between the main and supporting data series.
Signal alternation exists if the all three conditions below are satisfied:- Peaks between the two data series are trending in different directions
- Troughs between the two data series are trending in different directions
- Peaks and troughs within each data series are trending in the same direction
In the following six illustrations, we find that signal alternation only occurs
when both the main and supporting data are trending in opposite directions (i.e.,
non‐directionally aligned divergence). Figures 9.90 and 9.91 show two out of the
six idealized scenarios where there is signal alternation.9.5.2 heuristic for Determining no signal alternation
Signal alternation between standard and reverse divergence does not occur when:■ (^) Both the main and supporting data series are trending in the same direction
■ (^) Both the main and supporting data series are exhibiting contrasting sideways
formations (i.e., one data series expanding while the other is contracting)