Teaching You to Trade Stocks 44: Small-Level Divergence Triggering Large-Level Reversals
2007/4/10 15:23:46
With the last lesson, the most general case of "divergence level equals the current trend level" should be well grasped. The only area where difficulty might arise is the case of "divergence level smaller than the current trend level" — that is, so-called small-level reversals triggering large-level reversals. This situation requires further analysis.
Let's use the previous example again: an upward 30-minute level a+A+b+B+c. If c contains a 1-minute level divergence that ultimately triggers a decline pulling back into B, what exactly happened inside c?
First, c must contain at least one 5-minute hub; otherwise, hub B could not have been completed, because you couldn't have formed a third-type buy point. Let's assume c` is the last 5-minute hub within c. Obviously, this 1-minute top divergence can only appear after c`, and this top divergence will necessarily pull the movement back into c`. In other words, the entire movement can be seen as oscillation around c`. For this oscillation to produce a significant downward move, a third-type sell point of c` must obviously appear. Therefore, for those small-level divergences that can oscillate normally within the last sub-level hub, they cannot transform into large-level reversals. This conclusion is very important and can be summarized as the following theorem:
Chán Zhōng Shuō Chán Small Divergence–Large Reversal Theorem: The necessary condition for a small-level top divergence to trigger a large-level downward move is that the last sub-level hub of that level's trend produces a third-type sell point; the necessary condition for a small-level bottom divergence to trigger a large-level upward move is that the last sub-level hub of that level's trend produces a third-type buy point.
Note that regarding this situation, there are only necessary conditions, not sufficient conditions. That is to say, there cannot be a sufficient judgment that once a certain situation occurs, it must inevitably lead to a large-level reversal. After a small-level top divergence, the appearance of a third-type sell point at the last sub-level hub does not necessarily mean a large-level reversal must occur. In the above example, it does not necessarily mean the trend must return to the last hub B of that level.
Obviously, this theorem is somewhat weaker than the case of "divergence level equals the current trend level" which guarantees a return to the last hub of that level. But this is very normal, because this situation is less common and much more complex. Therefore, in practical operations, more complex procedures must be employed to handle this situation. For the "divergence level equals the current trend level" case, if your operational level matches that level, you only need to sell everything directly at the top divergence.
For the "divergence level smaller than the current trend level" case, for simplicity, let's still use the above example. If an investor operates at the 30-minute level, then a 5-minute pullback is necessarily within their tolerable range — otherwise they should adjust their operational level to 5 minutes. For a 30-minute trend type, a top divergence smaller than the 30-minute level must first trigger at least a 5-minute downward movement. If this downward movement does not return to the high point of the 5-minute downward trend type that constituted the third-type buy point of the last 30-minute hub, then this downward movement need not be heeded, because it's within the acceptable range. Of course, in the strongest movements, this 5-minute downward movement won't even touch the last 5-minute hub of the 5-minute upward trend type that contains the last 30-minute hub's third-type buy point — in such cases, it needs even less attention. If that downward 5-minute movement breaks below the high point of the 5-minute trend type formed by the 5-minute pullback that constituted the last 30-minute hub's third-type buy point, then any upward rebound must result in exiting first.
The above is the handling method for full-position operations. If you hold a larger number of shares, then when the last 5-minute hub of the 5-minute upward trend type containing the last 30-minute hub's third-type buy point produces a third-type sell point, you must first exit a portion, then exit completely when the situation described in the previous paragraph occurs. Of course, if the situation from the previous paragraph doesn't occur, you can buy back — consider it having made a quick short-term trade.
Someone might ask: why not exit at the 1-minute divergence? This is related to your assumed operational level. Trends cannot use predictive methods — that is unreliable. Since there is no prediction, it's not possible to assume that every 1-minute top divergence will necessarily lead to a large-level reversal. In fact, this situation is not very common. You can't operate at the 30-minute level yet dump everything at the sight of every 1-minute top divergence — that effectively becomes operating at the 1-minute level. If your capital size and operational precision allow you to operate at the 1-minute level, then there's no need to operate at the 30-minute level. Operating at the 1-minute level follows the same procedure as the 30-minute level, just at a different corresponding level.
Of course, for capital of a certain size, even when operating at the 30-minute level, upon seeing a 1-minute top divergence, you can sell a portion of shares and then decide based on the subsequent pullback whether to buy back or continue selling. This kind of operation is the only viable approach for capital of a certain size, because such capital cannot sell everything at any given sell point of a certain level. As for bottom divergence situations, just reverse the above.
(To be continued)
Replies
缠中说禅 2007/4/10 15:32:00
[Anonymous] 小丸子
2007-04-10 15:26:41
Master Chan, today my rhythm was completely wrong — got shaken out of 802 and 600961. Embarrassing.
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If your technique isn't good, just watch the 5-day moving average. For short-term, watch the 5-period moving average on the 60-minute chart. If these lines aren't broken, there's no need to pay attention at all.
缠中说禅 2007/4/10 15:32:55
[Anonymous] dliss
2007-04-10 15:31:03
Master Chan is absolutely right.
I'm always terrible at switching stocks. Looking back now,
the returns are about the same as not switching stocks,
and I wasted a lot of time and energy for nothing.
But if I don't trade, I can't improve my skills or train my mindset.
A dilemma, a dilemma.
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Holding isn't an operation? Holding doesn't train your mindset?
缠中说禅 2007/4/10 15:33:58
[Anonymous] 乐土
2007-04-10 15:32:55
What a thrilling day — full-position gain of 16%! Haha. Thanks to the teacher's heads-up, having psychological preparation gave me the courage to operate.
=
You must truly understand the charts yourself — that's when it's real skill.
缠中说禅 2007/4/10 15:37:11
[Anonymous] 缠心雕龙
2007-04-10 15:30:44
Hello blogger. A question about consolidation divergence:
Three segments of movement "up-down-up," designated A0 A1 A2. Assume A0 is shortest, A1 is longest, A2 is medium length, and A2's high point is above A0's low point but below A0's high point. Looking at MACD, A2's area is larger than A0's. In this case, can we say A2 has no consolidation divergence against A0?
It feels like A2's force returning to the hub is much greater than A0's force leaving the hub. Although A2 didn't make a new high, strictly speaking this shouldn't be called consolidation divergence, right?
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This was covered in the hub oscillation lesson — please go review it.
缠中说禅 2007/4/10 15:41:00
[Anonymous] Hindsight
2007-04-10 15:34:34
Master Chan:
You didn't see my question at the end of yesterday's discussion: the elephants take turns celebrating their zodiac years. Today's movement seems to have that kind of feel.
I feel the bears showed some technical skill today, controlling timing and rhythm very well, while the bulls seemed a bit impatient.
Retail investor sentiment is restless now, and the bulls are somewhat eager for quick gains.
Question: 1. Is it time to provoke China Unicom?
2. Will the elephants really take turns celebrating their zodiac years? Is this kind of script childish and laughable?
Thank you.
==
Why must a decline necessarily be caused by the bears? Can't the bulls wash out positions? Today, the decline before Sinopec's news came out was a brilliant stroke in the script. Think about it carefully.
缠中说禅 2007/4/10 15:51:41
[Anonymous] Sina User
2007-04-10 15:44:33
Teacher, you've worked hard. I bought 600782 at 10.44 yuan. Could the teacher please take a look? Thank you!
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This kind of stock isn't impossible to play, but if you're asking after buying, it proves your technique hasn't reached the level needed to play this kind of stock. So it's best not to develop the bad habit of chasing highs. This stock has no major issues medium-term, but short-term it's risen too fast — wait for the moving averages to catch up.
缠中说禅 2007/4/10 15:54:23
So sorry, I need to head out immediately. If I get back early tonight, I'll be back online around 9:30 for half an hour.
Heading out now. Goodbye.
缠中说禅 2007/4/10 22:22:42
Deepest apologies, just got back. It's too late to answer everyone's questions. I'll address them tomorrow.
Heading out now. Goodbye.
缠中说禅 2007/4/10 15:25:20
As I said yesterday, since Sinopec and others have very good earnings, large-cap stocks can no longer be suppressed. Those who talk about how high the P/E ratio is now — calculate what Sinopec's current P/E is? Not to mention that it can continue to grow at high speed this year. Actually, discussing all this is meaningless, except that the traitors always bring these things up, so let me address it too.
Today's volatility is a reaction to yesterday's gap pressure — technically a very simple situation, nothing special. Now, the Shenzhen 10,000 points I mentioned before is right before our eyes. Of course, this is mainly a time testing the wisdom of the regulators. A regulatory body that can't even accept Shenzhen at 10,000 points would absolutely be a historical joke. Whoever wants to be the protagonist of that joke, be my guest.
From a pure operational standpoint, just one 5-day moving average — I've repeatedly emphasized — watching this alone is enough. As for those who like to call tops, they've been doing it from 2,000 points all the way until now. A word of advice: never play futures, or you'll die without knowing how you died.
However, even at times most favorable to the bulls, you absolutely must not get complacent. Never chase highs at any time. In this kind of trend, if your technique isn't good, use moving averages to control your holdings — this is the simplest and most effective method. If you want to switch stocks, pay close attention to rhythm: you must sell at a certain level's top divergence, then wait until the intraday pullback has truly stabilized before switching. This minimizes risk. Generally, for those with poor technique, it's best not to randomly switch stocks. In a rotation trend, as long as they're quality second-tier constituent stocks or second-tier stocks with good earnings and dividends that this ID has repeatedly emphasized, they will definitely all launch.