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In Figure 5。6； the two Fs。over the RSI momentum extremes。highlight one of the weaknesses。of RSI。 The indicator is。prone to fail to develop divergence to the price data at key market reversals。 The cause of this。failure is。in the normalization of the indicator formula。 A solution is。to couple an indicator with the RSI that has。not been normalized。 The posite Index is。a formula I developed to identify divergence failures。within the RSI。 The formula is。protected by copyright by the Library of Congress； but the time has e to release the formula because it has。unique properties。that traders。value。 The formula warns when RSI is。failing to detect market reversals。so that the trader is。not caught by the change in trend。 It has been used in all financial markets and time horizons。for more than twelve years。
The posite Index was。developed to solve the divergence failure problem in the RSI； but its。ability to provide specific。horizontal。levels。of support within the indicator adds。to its。value。 The posite Index takes。the normalized formula of RSI and removes。the normalization range restrictions。 In Figure 5。7； the divergence to RSI in the posite Index。is。seen at points。N and P。 The formula for the posite Index uses。an embedded momentum calculation with a short…term RSI smoothed。 The concept of embedding a momentum study can be used within MACD （moving average convergence/divergence）； but stochastics。should not use thisncept in fast formulas。 If slow ％D is。used； thisncept can be applied； but extensive testing is。remended； as this。is。not how I used the formula to gain confidence under fire in all financial markets。in a real…time environment。
Detrending
Another way to experiment with divergences。between normalized formulas。and unrestricted indicators。is。to detrend simple spreads。between moving averages。 This。method is。not as。effective as。the posite Index for detecting RSI divergence failures； but the spread between averages。has。properties。that should not be overlooked。
In Figure 5。7； the horizontal lines。over the market are Fibonacci confluence levels derived from multiple Fibonacci expansion swings。 Selection of a swing from price low to high defines。the range used to create proportional swings。of 61。8 percent； 100 percent； and
161。8 percent。 These are then projected from a subsequent low that immediately follows。the range selected。 Multiple projections。derived from different ranges； but projected from the same pivot low； developed price resistance zones。at 84； 90； 92； 94。50； and 97。12。 The latter confirmed the geometric。calculation we developed in Figure 5。3。 It is。important to notice the spread between these zones。 The 84 level would be an ideal spot for oil to fail in a consolidation that needs。a plex pattern to develop。 But in excess。of 84； oil would run quickly toward 90； because there are few lines。of resistance to interfere。 It bees。clear that we need to monitor momentum indicators。at these key targets。to decipher the actual path oil will take as。it works。toward 97。
In Figure 5。8 the monthly chart is。displayed on the far left； with the weekly and daily data pared in the middle and far right。 The oscillator extreme is。the difference between two averages。plotted as。an oscillator。 When the averages。cross； the oscillator crosses through the zero horizontal line。 Therefore； the spread differential between the averages。is plotted as。a displacement from zero； which is。another example of detrending。 The three time horizons。are alwayspared together。 The monthly chart displays。an extreme negative displacement。 The daily chart shows。it is。neither overbought nor oversold。 The weekly chart might be suggesting that one will see a new price low after a price rebound。 The reasoning behind this。opinion is。that a new momentum extreme developed at Y and we should expect the old extreme； at X； to be retested in the future。 The posite Index is。a much better measure of this。type of retesting pattern into old lines。of horizontal support or resistance。 Such a retest often produces。a new price low。
Everything we monitor its。analysts。should contribute to our inner barometer or intuitive gut feeling。 It's。like having two inner poles： One pole weighs。bullish evidence； the other； our negative pole； measures。the mounting evidence to sell。 As。evidence builds。on one side； conflicts。can develop to offset the results。 When there's。a conflict； we stand aside。 This。balance bees。the art of technical analysis。 All that we do should contribute to our sense of probability based on the historical oute of our technical tools。 Therefore； methods。that provide valuable information and use different techniques。can enhance our accuracy。
Figure 5。9 shows。a one…month chart for the 3…month Eurodollar （bar chart） and an inverted one…month view of Brent crude oil （line chart）。 The inverse correlation shows periods。when the 3…month Eurodollar would lead the oil market or provide significant divergence to raise questions。about the relationship between these two markets。 As in 2003； when a highlyrrelated or inversely correlated market is。leading； it's。a good opportunity to examine the leading market to gain a jump on the market of real interest such as。oil。 If we could determine the calendar window when a market turn may develop in the leading market； it would offer an even greater advantage。
W。D。 Gann
Defining the dates。for high…risk。market reversals。can be done。 However； the methods are far more sophisticated than the conventional cycle analysismonly in practice today。 Markets。expand and contract along both price and time axes。 Most people use fixed…period cycles。in which a constant interval is。sought to connect market price lows。 This。is。a method that depends。on finding a correlation after the fact with hope it will repeat in the future。 This。method can never reveal the underlying cause of the cycle； and fixed…interval cycles。cannot contend with expansion and contraction phases。within the market's。natural progression。
In Figure 5。9； a time study has。been added to this。intermarket chart to introduce the cycle analysis。of W。D。 Gann into the discussion。 The analytic。work。of W。D。 Gann （William Delbert Gann； 1878…1955） is。widely misrepresented； causing much confusion for students。of cycle analysis。 The man himself wrote in a veiled language all his。own； making his。work。even more difficult to understand。 But he had pelling reasons。for writing in such a manner。
The interest in understanding W。D。 Gunn's。methods。are growing as。technical analysis gains。acceptance around the world。 In the 1920s； Gann reportedly made 56 million trading stocks。and modities。 He wrote several astonishing public。forecasts。 His。most well known is。the report for 1929 which detailed the timing； duration； and magnitude of the Crash of 1929。 Although his。ability to forecast the crash is。impressive； it is exceeded by his。further advice to his。clients。to aggressively buy stocks。at the lows。of the Great Depression in 1932。
One of the most useful original Gann charts。to study is。his。May Soybeans。chart。 It is。a hand…drawn chart （posted in the Chart Gallery on my Web site at aeroinvest） demonstrating Gann's use of confluence along horizontal； vertical； and diagonal axes。 Confluence further forms。from multiple methods。along the diagonal； which is。rarely applied or discussed correctly in today’s。booksncerning W。D。 Gann。 The start of the downtrend is。not the price high； but the small secondary high that marks。the start of the major decline。 It is。at this secondary retracement before a significant trend change develops。that his。methods converge； forming a confluence target in price； time； and geometry。 Gann often stated that the actual start of a new trend is not at the conclusion of the prior campaign or trend。 He viewed the first retracement that fails。to make a new high or low as。the start of the new trend and a safer entry for trading。 This realization often occurs。to more experienced traders。 Patience and risk。management are two reasons。Gann was。so successful。
Gann was。the most sophisticated practitioner of confluence analysis。 The Fibonacci target price zones。we explored earlier cannot answer the question of when the target zone will be realized and which major target is。the final pivot。 Yet Gann was。able to identify the price； duration of the trend； and timing for the start and end。 This。level of clarity is。impressive。
The written forecasts。prove Gann's。methodology； but then the new student faces。a major obstacle to learning his。methods。of market analysis。 Most books。on the market todayntain the work。of John L。 Gann and not the methods。of his。father。 Traders。then mistakenly。apply the son's。methods。with poor results。and abandon their desire to learn more。 Confidence was。further eroded when John Gann claimed his。father was。a fraud and did not have the financial assets。to substantiate the trading gains。within the United States。 These questions。overshadowing W。D。 Gann can all be explained。
A closer look。reveals。that John may have been a bitter man carrying a grudge to his。grave。 Gann divorced John’s。mother； Sadie； in 1937。 When Gann married again in 1944； his third wife； Londi； was。thirty years。younger。 John apparently never accepted the union。 Add to this。the fact that John L。 Gann in