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In Figure 1, the market is in an intermediate-term uptrend during the October to February period.

Parameter 1 is thus met. The stochastic in late December and early January stayed above 75 for more than three periods, so parameter 2 is met. Then, in the third week of January, the market action closed lower, turning the momentum of the market down and forcing the stochastic below 75. Thus, parameter 3A is met. The bond market rallied strong enough from 98 to 102 to push the stochastic back into the 75 area again, and so parameter 4A is satisfied. With the first four parameters satisfied, it was time to seriously consider the pattern as a possible market resolution.

Finding the bar responsible for turning the stochastic down is easy. Sometimes this price bar will be an obvious negative close, while at other times it will be a trading period of stalling momentum. On Figure 1 the third week of January marked the first sign of stochastic deterioration, and so parameter 5 is met. From here, it was simple to count from the third week of January to target the last week of March as the 10th week for a possible pattern. Thus, on the close of the 10th week, parameter 6A is met. I entered a slightly aggressive short position in the June bond at 102, even though my soup of technical indicators was in a neutral position.

After the close of the 11th week, the first week of April, the pattern was confirmed. By the end of the 12th week, a clear trend change as well as a wonderfully profitable short position in the bonds had occurred. The pattern was now indelibly etched on the charts. The bearish divergence on this chart did not occur until a week after the position was established; placing a money management stop in the market with the after-the-fact technical indicators would have been unwieldy and expensive, limiting a potentially aggressive position and profit potential.

In Figure 2, the daily March 1989 Value Line contract, the stochastics pattern bears a striking

resemblance to that of the Treasury bond in Figure 1. A divergence was also signaled on October 24 after the stochastic pattern was traded, in this example a day later. Again, the parameters, especially 6A, enabled me to take a much more aggressive position at 250.50. My stop-loss was only $600 away per contract at 251.70 versus the divergence signal of $1,500 per contract at an entry price of 248.70.

The accuracy of parameter 6A is also displayed in Figure 3 (March 1989 soybean oil), Figure 4 (March 1989 coffee) and Figure 5 (December 1991 Deutschemark). The short positions established on the close of the 10th bar were pain-free trades with a very tight, well-defined stop-loss. Figure 6 (October 1993 sugar) illustrates the valuable flexibility of parameter 6B. May 14, the 10th day of the pattern, was a new high for the 10-day range. Since the market lacked any signs of weakness, the elastic three-day window was open.

At that point, most of the breakout buyers were lured into the market, if not on the close of the 10th day, then certainly by the 11th day. As Figure 6 illustrates, May 17, the 12th day, was a technically devastating lower close. Using parameter 6B, a position was entered automatically on this lower close at 1261, less than $300 away from contract highs. The position was comfortably supported by other confirmation signals. On the 11th day, the trend-followers (or trendlemmings) created an exhaustion gap.

Figure 7 (March Canadian dollar 1994) is a far less intimidating scenario compared with the October 1993 sugar market example in Figure 6, but it is another example of the value of parameter 6B of the pattern. The 10th day marked the absolute high for the bear market rally. Therefore, a position was automatically entered on the lower opening of November 8 at 7701. The 11th day provided a minimal-risk entry with the stop-loss exit of the 10-bar high only $245 away per contract. Once again, following the after-the-fact divergence confirmation signal would force a trader to enter at an inferior price and provide generous room for a reasonable stop-loss, as much as $1,000 per contract.