Breakthrough Strategies for Predicting Any Market: Charting Elliott Wave, Lucas, Fibonacci, Gann, and Time for Profit, 2nd Edition

CHAPTER 5

Divergences

It was the original intent of this chapter to help the multitudes of traders who use very common indicators such as moving average convergence divergence (MACD) not to get into the habit of picking tops or bottoms based on the indicator alone. The inspiration for this chapter was the old bull market, which extended beyond what most people would expect. Some of us have to find out the hard way that a market can stay extreme longer than we have money to ride it out. This chapter is the first defense against people picking tops or bottoms based on lagging indicators. Since this book was originally published I have moved away from using lagging indicators such as MACD at all. I don’t use them anymore. But I realize that many people do and are going to continue to use them no matter what anyone says. Appel created an excellent indicator to give people an idea of when a market is coming to an extreme. But we are going to give you the choice of deciding for yourself about whether you want to continue using lagging indicators or slowly start to wean yourself off them. So we are going to start slowly, but as you’ll see there will be an evolution of moving from the lagging indicator to using none at all.

Markets can and will stay extended for long periods of time. We know now what we didn’t know back in 2006. We know that optimism and euphoria went to historic extremes before the bull market ended in October 2007. So there are few things worse than getting stopped out ...