You don't have to follow all the arrows, just understand the concept of a negative divergence=distribution which can be selling or short selling. The idea is the 3C indicator is lower at it's high then it was at a lower point in time. If there was confirmation of a healthy trend, 3C would move in almost lockstep with price and make higher highs.
The idea of a divergence (negative) is smart money picks up or has a position they want to sell, or they want to go short into. Like you or anyone else with common sense, you want to either sell or go short into the highest prices possible. For you and I that's pretty simple, for smart money there's another factor. the size of their positions are not 100-1000 shares like most of us, they are hundreds of thousands to millions of shares. Just like economics 101, the rules of supply and demand apply. If they flood the market too quickly with their supply to sell or try to accumulate a short position (still= selling) too quickly, then they throw off the supply/demand balance and send prices lower, exactly what they do not want. So smart money must feed out their shares incrementally in smaller packages, this type of selling is very difficult to detect, 3C does a great job at sniffing it out. So a smaller position takes less time, therefore the divergence will be shorter before the reversal-market volume and retail buyers willingness to absorb supply also factor in. So low volume or uninspired buyers can cause distribution of a position or accumulation of a short to take a longer time.
This is where 3C is of no use, in determining their position size and plans for their short size, although I have a few ideas I'm working on to give a better feel for how much they have accumulated. The market maker also plays into this and can front run institutional money as they are filling the orders for the smarties. This can also be a factor as Market makers or Specialists trade their own accounts in addition to making a market. It's said that up to 30% of a stock's volume per day can be the market maker simply trading their own account. They are known for taking the opposite side and basically betting against the customers who have tasked them with executing their orders-Wall Street is dirty, there's not a lot of loyalty.
So in nutshell that is the idea. While it is not perfect, it does tell you something very important-they are selling. Without 3C you'd simply see an uptrend and most probably assume they are buying and would most likely fall victim to being the last person standing when the music stops.
Last night I ran the simplest of tests using 3C with a random basket of stocks and we saw what would be a return that most managers would die for. So obviously it works and my years of experience with it show that it works well. Like I often tell you, the reasons are unknown. We find out later. At the moment is is occurring , the logic seems counter intuitive. I have reasoned against the 3C charts many times and missed great trades, so now I trust them until shown otherwise. the reasons will probably come out later and the reasons aren't that important unless your primary concern is outsmarting the market. Which opens the door to leave you with this market motto, "Do you want to be right, or make money?"
I'll be working more on trading systems, if anyone has specific requests, specific groups or trading styles they'd like to see covered, let me know. I figure I'll have a tending system, a swing system for times like this, a short term system and an investors long term system for those not interested in watching the market every day.
