Cryptocurrency Exchange - Consolidation Divergence and Historic Bottom

The situation of divergence typically occurs after the second central pivot, accounting for the vast majority of cases, especially on daily charts and above, where it reaches nearly 90% or more. Therefore, if a second central pivot appears on a daily chart or higher, close attention should be paid to the emergence of divergence.

The most useful application of consolidation divergence is on larger timeframes, especially at least weekly charts or above. The divergence detected in such consolidations often marks a historic bottom.

Taking Vanke as an example, on the quarterly chart’s third segment, a divergence can be identified on the monthly chart targeting the last central pivot of the month. This divergence segment must also be within the divergence segment on the quarterly chart. Moreover, the interval shrinks as we extend this process from the monthly to weekly, daily, 30-minute, 5-minute, 1-minute charts, and even down to each trade, with the range continually decreasing.

In trends, there are always at least two central pivots of the same level. Divergence certainly does not occur after the first central pivot; it must happen after at least the second. For extended trends, divergence might only occur after the 100th central pivot. Of course, such cases are rare, occurring perhaps only once in a century. The divergence after the second central pivot accounts for the majority of cases, especially on daily charts and above, where it reaches nearly 90%. Therefore, if a second central pivot appears on a daily chart or higher, close attention should be paid to divergence. On smaller timeframes, such as 1-minute charts, this ratio is smaller but still constitutes the majority. Divergence after 4 or 5 pivots is quite rare.

If divergence appears at the first central pivot, it is not a true divergence but rather a consolidation divergence. Its true technical meaning is an attempt to break away from the central pivot, but due to limited strength, it is halted and returns to the pivot.

Generally, small-scale consolidation divergence has limited significance and must be considered in context. If it occurs at a high level, the risk is greater, often involving high-stakes trading; if at a low level, its significance differs because most second- and third-class buy points are formed by consolidation divergence, while first-class buy points are mostly formed by trend divergence.

Typically, second- and third-class buy points follow a three-wave pattern, with the third wave often surpassing the extreme of the first wave, forming a consolidation divergence. Note that here, the comparison is between the first and third waves, which differs slightly from trend divergence scenarios. Whether these two wave types are necessarily trends is not critical; two consolidations in a consolidation divergence are also comparable in strength.

Here, I will add a definition: in a certain timeframe and type of trend, if divergence or consolidation divergence occurs, this segment of trend is called a divergence segment at that level.

The most useful application of consolidation divergence is on larger timeframes, especially weekly charts or above, where such divergence often marks a historic bottom.

The simplest method for judgment is using MACD. For example, in the third segment, the price drops below 3.2 yuan in the first segment, but MACD clearly shows a standard divergence pattern: the retracement of the zero line (yellow-white line) does not make a new low, and the histogram area is significantly smaller than in the first segment. Generally, if either condition is met, it can be a divergence signal; if both are met, it is even more reliable.

Zhong Shen’s precise turning point search theorem:

Theorem: The turning point at a large timeframe can be determined by the successive contraction of divergence segments at different levels.

In other words, first identify the divergence segment at a large level, then find the corresponding divergence segment at a subordinate level within the subordinate chart, and repeat this process down to the lowest level. The corresponding turning point is within the range defined by the divergence segment at that level.

If this lowest level can be refined down to each trade, theoretically, the large-level turning point can be pinpointed to the divergence of a single trade, or even a single transaction. (When this theorem was discovered over a decade ago, there was a flaw: the hope was to achieve such precision in practical trading, leading to the invention of some peculiar chart reading methods. However, these are of limited significance. Divergence segments on 1-minute charts are generally calculated in minutes, which is sufficient for large-level turning points. For large capital, this is practically useless.)

Class one buy points are definitely formed by trend divergence, while those formed by consolidation divergence at small levels are of limited significance and were not previously regarded as a distinct buy point. However, at larger levels, they also constitute a type of buy point similar to the first class, because in ultra-large timeframes, a clear trend often does not form. This aligns with what I mentioned in previous replies: from the largest perspective, all stocks have only one central pivot. Therefore, at large levels, most stocks are essentially consolidations, and this is where the class of buy points formed by consolidation divergence becomes relevant. This level should be at least weekly or above.

Similarly, at large levels, if no new lows are formed but buy points resembling the second class appear—indicated by MACD showing divergence-like behavior, with the yellow-white line retracing around the zero line and the histogram area smaller than the previous one—this can be a valid buy point. A typical example is the stock 600685 on the quarterly chart, with the third quarter of 2005 at 2.21 yuan forming a classic second-class buy point. In practice, identifying the corresponding range for 2.21 yuan also follows the step-by-step divergence segment identification method described above.

This lesson describes a method for identifying the bottom of a major bull market, which can benefit you for a lifetime. As stocks increase and old stocks accumulate, this method will shine in the next big bull market, which might occur 30 years from now. I hope you remember this lesson then. Of course, if you use weekly charts, you won’t have to wait 30 years. However, the bottoms identified on weekly charts may not be historic lows but rather longer-term bottoms. Applying this method to daily charts is also feasible, but the reliability is less absolute.