Market delta cycles, and what a divergence is telling you
Lesson two used delta as a condition and left it there. This one is the mechanism: what a delta cycle is, why price keeps coming back to the level where a divergence started, and how he reads nine of them against the interest rate differential on one instrument.
Lesson 3 of 12. Everything here needs a feed that reports real volume with buying separated from selling.
Two cycles, running at different speeds
He starts a long way back from the chart. A market cycle in the ordinary economic sense moves through four phases — expansion, a peak, contraction, and a trough that turns into the next expansion. What drives it is not on the chart at all: interest rates, consumer confidence, government policy, global events.
His point is about order. Those cycles set the direction the market is willing to go, so the first question is which one you are in — that is decided before any pattern is looked at.
Inside that slow cycle there is a second, much faster one, driven by what participants are actually doing rather than by what the economy is doing. That is the delta cycle, and it is the subject of the rest of the lesson.
What a divergence claims, and what else it could be
Delta is aggressive buying minus aggressive selling. A divergence is when it stops agreeing with price: the market makes a new high while the buying behind it makes a lower one, or falls while the delta turns positive.
The claim is modest and worth stating precisely. It says the move is not being paid for by the flow that normally accompanies it. It does not say the move is over, and it does not say which way price goes next.
He then does something most write-ups leave out, and it is the most useful paragraph in the range: he lists the ordinary reasons delta and price come apart that have nothing to do with sentiment at all.
- Thin liquidity or shallow depth — with too few participants to balance the flow, delta moves out of proportion to price on its own.
- One large trade printed away from the broader market, distorting the delta for as long as it takes to absorb.
- Hedging. A position being hedged in a related instrument moves the delta here without anyone having a view on this one.
- Options delta hedging, where futures flow is a by-product of adjusting a position in another market entirely.
- Discrepancies between price and volume or open interest, which can equally mean accumulation or mean nothing.
Why the level it started at gets tested again
Slide 53 asks a question the rest of the section depends on: why does price so reliably come back to where the divergence began?
His answer is not that the level is magic. It is that a lot of separate mechanisms all point at the same price, and they reinforce each other.
The practical consequence is that the level is worth marking even when you do not trade the divergence itself. On the weekly example he puts it plainly: these points act like magnets, because the liquidity is sitting above them.
- The level becomes a reference point, so orders get placed around it when price approaches again.
- Market memory — significant levels are remembered and watched, by people and by algorithms reading the same history.
- Stops and take-profits cluster there, and activating a cluster moves price by itself.
- The expectation is self-fulfilling: enough participants expecting the retest will produce it.
- A retest is also where the original read gets confirmed or invalidated, which is a reason to wait for one rather than to fear it.
Four cycle lengths, and the one that contains the rest
He divides delta cycles by how long they run, and the division matters because it sets how much weight a zone carries.
The rule he repeats is short: the higher the cycle, the more important and more solid the zone. A daily divergence is a trade. A monthly one is a level you will still be marking six months from now.
- Trend cycles — the shortest. These are the entry points from lesson two, where a sharp entry or a stop hunt happens.
- Daily — the most active, with the most frequent swings. This is the one that gives you an immediate read on how the market took a piece of news, an economic release, or a shift in sentiment.
- Weekly — the same pattern one level up, and useful for short-term sentiment and where resistance is forming. He notes that a delta can close positive across a week whose price fell, which is exactly the disagreement worth having.
- Monthly and contractual — not for entries. These are read for long-term sentiment and for the view the large participants are taking on the underlying.
Reading long-term sentiment off the contract
The monthly and contractual cycles do a different job from the rest, and slide 54 is where he explains it. They are not there to time anything. They are there to tell you what the large participants think of the underlying commodity.
The case he works through is the one that looks wrong at first. A futures contract is falling in price while its delta is positive. Read literally, that says the market is being bought into on the way down.
His interpretation is that this is what valuing something looks like. Buyers are accumulating because they regard the commodity as worth more than it is currently trading at — the current direction is not the one they are positioning for. Four things follow:
- Positive delta in a falling market is a sign of underlying strength, or of a shift in sentiment that price has not caught up with.
- It says the market values the underlying, or treats it as undervalued, whatever the trend is doing.
- It reflects a long-term view rather than a short-term one. Nobody accumulating on the way down expects to be paid this week.
- It can precede a reversal — but "can" is his word, and the timing is not in the signal.
Rollover, and why the contract is the largest cycle
Before the walkthrough he explains something that is easy to skip and changes how the chart is read. The largest cycle available is the contract itself, because when a futures contract expires it stops existing.
Most participants are not there to take delivery, so as expiry approaches they roll over — close the position in the expiring contract and open the same position in the next one. Keep the exposure, avoid the settlement, and move to where the liquidity has gone.
He gives five reasons it is done, and they are worth having because each one leaves a mark on the chart:
- Avoiding settlement. Most participants have no use for the physical commodity or the financial settlement, so they leave before it happens.
- Maintaining exposure. Moving the position to a later contract keeps the view intact without a break in it.
- Managing risk. Expiry and settlement carry their own risks, separate from the direction of the trade.
- Liquidity. A contract thins out as it nears expiry, so the roll is also a move toward where the business is.
- Cost. Rolling is not free — there is the spread and any difference between the two contracts' price levels, and it has to be worth paying.
The distinction he draws is blunt: roll, and the position carries into the next contract. Do not roll, and at expiry you receive the underlying commodity.
What this means for reading a chart is that the large participants are continuously in a contract, carrying positions forward and paying to do it. So the analysis starts at the contract cycle and works down toward the shorter ones — which is the order the walkthrough below follows.
Reading it against the data: the rate differential
Everything from here is one worked example, on the euro FX future, across six contracts.
The spine of it is the interest rate differential between the eurozone and the United States, and the CPI prints that move it. He marks the differential as levels on the chart — 0.25, 1.00, 1.25 — and treats them the way most people treat support and resistance, except that the reason they exist is not on the chart.
The mechanism he describes is straightforward. A CPI release changes what the market expects a central bank to do. That changes the expected differential. Price then travels toward the level matching the new expectation — and it is on that journey that the delta cycles give him somewhere to get in.
Where he actually takes a trade is where three things line up at once: the economic data, the position in the cycle, and a technical level from lesson two — usually the Midas VWAP of the primary trend. On the second figure he notes he did not take the first opportunity precisely because one of the three was missing: the correction had not yet reached its VWAP, so it was not finished.
The rule for marking a zone
This is the one mechanical rule in the section, and it is short enough to memorise.
When a period moves up and its delta is negative, the low of that period is the significant price. When a period moves down and its delta is positive, the high is. Day, week or month — the same rule at every length.
The logic is that the extreme is where the flow that disagreed with the move was doing its business. That is the price the market has unfinished business at.
Marking the zone is not the trade. Once an area is identified he goes back to the techniques from the previous lesson — a trend entry, or a volume based one — to actually get in. The divergence tells you where to look, not when to press the button.
With the data, and against it
Not every zone is tradeable, and the filter is not technical.
A divergence pointing the same way as the economic data and the primary trend is an entry. A divergence pointing against them is not — he says plainly that those should not be used for long-term entries. They might carry a short move, but their real use is different: partial exits, or a support and resistance level to work with later.
The third figure in the walkthrough is the interesting case, because it is where he starts to doubt the trend itself. The volume slope stopped supporting both the delta and the direction of the movement, and the volume on the correction side was increasing. His conclusion is careful: with risk control, that combination can mean the primary trend is about to change, so both directions become possible — with the bias still on the side the data favours.
- With the data — take the entry, and hold it for the movement.
- Against the data — no long-term entry. Use it to take part of a position off, or keep it as a level.
- The longer the cycle the zone came from, the more solid it is, whichever of the two it turns out to be.
The trade he closes the section with
The last figure is a complete example and it is worth following because nothing in it is a chart pattern.
Rates were stable on both sides, so CPI was the thing that mattered. Eurozone CPI had come in at 2.9, below the US, which weakened the case for a European hike. Then US CPI fell from 3.7 to 3.2, and the market concluded the US would hold as well. With both expectations settled, price moved quickly toward the 1.00 per cent differential area.
The entry was the bottom of a delta cycle on the way there — which he describes, as he does throughout, as the best entry with the least risk.
The sizing is the part worth copying: six contracts in, two of them closed at the first target, on a weekly cycle. He does not present the trade as one decision. The entry is one decision and the exit is several.
What delta will not tell you
He ends the section with a restriction, and it is stricter than the way divergence is usually sold.
Every strategy in this section must be based on fundamental analysis and must follow the structure of the trend. The entry itself comes from the trend trading techniques or the volume techniques — not from the divergence.
Read against the list near the top of this page, that is consistent rather than cautious boilerplate. If delta and price can come apart because one hedge was placed or one large order printed, then a divergence on its own cannot carry a position. It is the last of three conditions, and the other two come from outside the chart.
He is equally direct about the prerequisite: without an understanding of economic cycles and the money market data behind them, a significant part of this strategy is lost. Not degraded — lost.
What to take from this one
Three things, in the order they matter:
- A divergence is a disagreement between price and the buying behind it — not a signal, and not a direction. Half of what can cause one has nothing to do with sentiment.
- The level where a divergence began gets tested again, because that is where the orders were left. Mark it even when you do not take the trade.
- Cycle length decides weight, and the economic data decides whether a zone is an entry at all. Delta confirms; it never leads.
Next: levels built from volume instead of from lines
This lesson kept pointing at levels — the zone a divergence leaves behind, the area where price is expected back. Lesson four is where those levels come from: support and resistance drawn from where business was actually done, and what a thin area predicts.