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Trading now may get a little tricky. Intuition and experience pay off. There is a lot to be learned from examples like this one.

Prices have closed above two previous highs - mid-December's 8915 and early-November's 8928. New highs to determine P2 have not been made. Stochastics are bouncing around above 80, you're long one September Bond from 8816 and . . . now what?

First, notice the divergence. Prices are rising while stochastics are falling. Prices seem to be in an upward channel.

In this instance, draw 45-degree lines from reaction points as your stop-loss lines. Prices may fluctuate within this upward divergence channel. The easiest and safest way to handle this is to set your stops and let the market take you out of your position.

45-degree lines D and E are examples. Stops can be set at the price level of the PREVIOUS day and stop-line level. If you prefer a little more room, set the stops at the level of the SECOND-PREVIOUS day.

Another option may be to place sell orders 32 points above the previous day's high, while moving your stop up daily. That amount is a substantial move, but if you get it, that's all the more profit. If the market stops you out, that's still profit.

Using line E, and the price level of two previous days, your position would have been stopped out on 1/31 at 9018.

Another winner, and a big one at that:

Bought on 1/10 @ 8816

Total Points = 2-03 = 67 points

$1993.75 profit in 15 trading days!

Previous profit balance = $1518.75 Profit from Trade 3 = $1993.75

Current profit balance = $3512.50

When the expected bear move occurs, again a price target is needed. Two Retracement Zones have been plotted. Both zones use the high of 1/27 at 9117 as P2.

Pl-1 for the first zone is the 1/5 low of 8718 resulting in a RZH1 of 8829.

PI-2 for the second zone is the 11/25 low of8600 resulting in a RZH2 of8824 and a RZL2 of 8726.

During a divergent period, it is important to keep close stops. Prices may have a tendency to collapse, and collapse with little warning. It's something like holding a balloon full of air and letting it go. Things happen very quickly and the balloon (prices) could go every which way. Too wide of a stop may cause an undue amount of profit to be lost.

If you doubt this, take a look at the next section and Chart 39. It will prove the point.

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