In the example I gave in Part 1, price is in a downward trend making a low D1 followed by a lower low D3, whereas a technical indicator fails to make a new low at the time of D3. These points are shown in the chart below. D2 marks the high point between the lows D1 and D3.
Validation looks at the price level D3 in relation to D1 and D2. If you draw a fibonacci expansion based on the length D2-D1 then D3 should lie on either the 123.6% or the 138.2% level. The platform I use doesn't provide a tool to do fibonacci expansions, so this is how I do it: draw a line segment from D2 to D1. Move the segment so that it starts at D1. In the chart above the segment is shown as D1-P21. Now draw the fibonacci retracement levels from P21 to D1; D3 should lie on the 23.6% level or 38.2% level. In the example above, D3 is precisely on the 23.6% level.
The next step is to determine a potential target level. This is based on fibonacci expansion levels from D3 to D2. I use the same trick as before and draw the line D2 to P32. The usual target level I take is the 61.8% expansion level. The minimum target I would use is the 23.6% level.
The next step will be to look at the entry criteria ...
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