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Chapter 7 — Time Divergence: An Old Method Revisited
Old Timers’ Method for Finding Trade Setups
Most of you are familiar with what
Divergence is. If not, it is simple and
intuitive – divergence occurs when an
underlying indicator doesn’t reflect price
movement. For example, a bearish divergence
occurs when prices make new
highs yet the underlying indicator does
not. To clarify this point, I am including
a price chart of Cocoa above its MACD
(Moving Average Convergence/Divergence)
chart to illustrate typical bullish
and bearish divergences between the two
(Figure 70).
Notice in the lower left hand corner of
Figure 70 that in October 2006, Cocoa
prices pushed below the September 2006
low. However, the underlying indicator
(MACD) registered higher lows during
this same period. This condition is referred
to as bullish divergence. Indeed,
Cocoa prices soon started trending up.
Conversely, in February and March, we
saw higher prices beyond the December
2006 peak. Yet MACD failed to mirror
the price chart and instead registered
lower highs during this same period.
This bearish divergence suggests an
upcoming decline in Cocoa prices.
Now that the explanation of Divergence
is out of the way, let me share with you
a unique twist on the subject. It’s something
I call Time Divergence, and it occurs
when price extremes in front-month
or forward-month futures contracts
diverge from price extremes evident in
higher time-frame continuation charts.
Let me explain. In Figure 71, you can
see that in Sugar’s weekly continuation
chart, lower highs occurred during the
Figure 70
Figure 71
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