Silver recently provided an example of how well the TD-Sequential system can work, why professional traders love it – and how much a volatility ride you can be in for trading precious metals right now.
A Quick Silver Sequential
Momentum Optimization Using Tom Demark Signals
or “Why the first week of May was so bad in the Markets.”
Since last summer I’ve been successfully trading a new momentum system. 5 of first 6 trades were profitable, trouncing the S&P 500 return – even from the bottom of last year’s bear market. These trades can be seen (and followed) in the spreadsheet I keep at the bottom of my home page. On April 22nd of this year the momentum system switched into IWN – the Russell 2000 Small Cap Value. Over the next month (which included the fateful first week of May) IWN proceeded to fall straight down by 9%, before the momentum system switched into another ETF.
That’s the danger of momentum – it cuts both ways. Or as they say, “The trend is your friend – except when it ends.”
Despite this unprofitable trade I am still well ahead of the market with my momentum trades, and I expect this will be a successful system for the future. But the loss got me researching ways to determine when Momentum is slowing – which led me into the trend exhaustion studies of Tom Demark.
Tom Demark has served as a consultant to such high-powered hedge fund managers as George Soros, Paul Tudor Jones, and Steven A. Cohen. The Demark indicators are sophisticated market-timing tools, designed specifically to anticipate trend reversals. And unlike much of technical analysis, they are mechanical, with less debate on whether a buy/sell signal has been sent. On this site I’ve devoted a lot of posts to Tom Demark where I am capturing as much as I can find of his work, along with my notes.
Two of Demark’s most popular public indicators are TD-Sequential and TD-Combo. Both indicators include a ‘Setup’ phase, and a ‘Countdown’ phase. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar. If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. If before price bar 9 is reached a price bar fails to close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected” Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 (or one that follows) is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 (or one that follows) that is greater than the highs of both price bars 6 and 7.
The ‘Countdown’ occurs after a completed Setup. A sell Countdown consists of 13 price bars whose close is higher than or equal to the high two price bars earlier. Unlike the Setup, the Countdown doesn’t have to consist of consecutive days. The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes. Like the Setup, the Countdown also has a “perfection” criteria. For a sell Countdown this requires that the high of price bar 13 be greater than or equal to the close of price bar 8 (reverse is true for Buy Countdowns). There is also ‘Perfection’ criteria for the Countdown, where high of bar 13 is above the high of bar 8 for Sells (13 low below 8 low for Buys).
The only difference between TD-Combo and TD-Sequential is where you begin the Countdown. TD-Combo begins the Countdown on bar 1 of the Setup, whereas TD-Sequential begins the Countdown only after a completed Setup (no sooner than bar 9).
One pattern that is not often seen, but sends a powerful message, is the TD-Sequential 9-13-9. This is a standard TD-Sequential signal which is then followed by a price flip and then another 9-bar Setup phase.
I am no expert on Demark, but I wanted to share a study I’ve done on IWN in the chart below. If I had been looking at this chart on April 22nd, I would have known to avoid this fund -with extreme prejudice. I could have saved myself an unprofitable trade, and conserved cash for the new top fund once the momentum system switched.
The End of the Trend
2 Years of the Russell 2000 Value Fund below.
That terrible first week of May was what’s known as a ‘Price Flip’, where the trend changes direction and closes below the close 4 bars earlier. After such a long 1-year development of the TD-Sequential 9-13-9, in particular one that did not break thru resistance, it is not surprising that we had such a significant turn.
One could have used these systems to buy exactly at the March 2009 low, and sell at the April 2010 peak. Maybe that’s why the likes of George Soros and Steven Cohen keep Demark on retainer!
The last 2 years of the S&P 500 and several other indices look similar to above. This gives quite a bit of technical support to arguments a new leg of the bear market has begun. Using other Demark tools such as his TD-Retracement and Range Projections, we can forecast where we can expect the next lows to be.
I plan on continuing to study Demark and apply his principles to my momentum portfolio, so I’ll have notice next time it is clear that the trend is at the end.
Living And Learning With Tom Demark Indicators
“The trend is your friend – except when it’s about to end!”
I sold my 3 remaining stocks today, CCL, JCOM and WDC. Two were sold at a profit (CCL and JCOM), while WDC was sold at a loss. On average the three stocks beat the return of the S&P 500. I did not hold these positions long (4 to 7 months), and all 3 were still below my estimate of Intrinsic Value.
So what made me sell?
For one, some of the smartest market minds I know (ie. John Hussman, Richard Russell, Eric Janszen, John Mauldin, Mohammed el-Arian) are saying that the Bear is back – and stocks in general are headed much lower. I’ve posted several of their articles on this site, and here’s a link to a recent Hussman article Don’t Mess with Aunt Minnie where he gives a warning similar to his December 2007 call just before the last bear market.
But market forecasts are often wrong. People will always be forecasting both bull and bear markets. My intention with my individual stock holdings was to ignore these calls, and hold good stocks thru thick and thin, bear and bull alike – until one day the market recognizes their intrinsic value.
The reason I sold the remaining 3 stocks was that I’ve been reading the work of Tom Demark. Tom Demark is a technical advisor to some of the largest trading operations in the world, including Tudor Group and SAC Capital. His most popular public model is called TD-Sequential, and is designed to “Buy on Weakness” and “Sell on Strength” by identifying what he calls ‘trend exhaustion’. It can be applied to any time interval, from intra-day, to daily/weekly/monthly. It is said to be more than 70 – 90% accurate, whereas most technical analysis indicators are less than 50% accurate.
In the ‘Wealthy’ section of the site you’ll see I’ve devoted a page to Tom Demark in order to capture everything I can find about his systems.
The TD-Sequential indicator
Setups
The TD Sequential Indicator consists of two patterns, a TD Setup and a TD Countdown. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar. If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. If before price bar 9 is reached a price bar fails to close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected” Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 (or one that follows) that is greater than the highs of both price bars 6 and 7.
When looking at a Weekly time frame, The TD Setup is often the only pattern you need to follow. Looking at my purchase of CCL (Carnival Cruise Lines) – which I bought last fall at $31.29, you can see it completed a TD-Setup pattern this spring (week of April 19th, 2010). Based on this indicator I should have sold the following week, which would have been at the 52-week high. I would then sit in cash and wait for the next TD-Setup pattern (this time for a Buy) on this stock. Nevertheless, this was a profitable trade for me, though not at the yearly high.
The second stock I sold today was JCOM (j2 Global Communications). JCOM was purchased on February 1st, 2010, during what turned out to be Week 2 of a TD-Setup. It was good – if lucky – timing. The Setup was completed the week of March 22nd. One method of assuring the trend is over is by waiting for a Trend reversal, or Flip Week, where in my case the price closes lower (for a Sell Setup) than the price 4 bars earlier. This occurred the week of May 3rd and is indicated on the chart below.
My third and final stock sale of the day was WDC (Western Digital Corp.) It was sold at a loss, and according to Tom Demark Indicators, it never should have been purchased in the first place. To see why, we need to learn about the second half of TD-Sequential, called ‘Countdown’.
Countdown
A TD Countdown occurs after a completed Setup. A sell Countdown consists of 13 price bars whose close is higher than or equal to the high two price bars earlier. Unlike the Setup, the Countdown doesn’t have to consist of consecutive days. The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes. Like the Setup, the Countdown also has a “perfection” criteria. For a sell Countdown this requires that the high of price bar 13 be greater than or equal to the close of price bar 8.
As seen in the chart below, prior to my purchase on February 1st, 2010, WDC had completed a full TD-Sequential Sell signal in the prior year – ending the week of November 9, 2009. According to Demark, this is a powerful sell signal and we should not purchase this stock until the current situation is cleared by a new TD-Sequential Buy signal. My purchase on February 1st, 2010, violated this rule, and not unexpectedly I suffered a slight loss with the sale today.
[Note to Self] If Countdown is counted High vs High 2 bars ago (instead of Close-High), then WDC actually completed a TD-Sequential 9-13-9 signal on Dec. 31, 2009, which remains the high for past year. (This is not shown on chart) The 9-13-9 signal is a very powerful trend exhaustion signal.
Many analysts calculate the Intrinsic Value of WDC to be above $100 per share. So it would seem that buying (or holding) today at $33 is a bargain. But Tom Demark would say that a better entry point lies in the future for this stock.
The Future
Do I plan on following these Demark Indicators all year long with each stock, trading in and out? No, not exactly. These 3 stocks were sold today based on my readings of the market environment, in addition to the Demark Indicators. I don’t wish to do too much trading, I’d rather buy and hold for a 1-2 year period until the value is recognized by the market.
My plan is to use the TD-Sequential (and other Tom Demark Indicators) to find low-risk entry points for new stocks (and avoid High Risk entries like WDC). In addition to these 3 stocks, I have several other stocks which have recently fallen below Intrinsic Value – but I’m watching and waiting for the Demark Indicators to tell me when to enter.
Live and Learn.
Tom Demark Q & A
Q: How precisely are you trying to pick tops and bottoms?
That’s one of the unattainable “holy grails” of trading,
isn’t it? Don’t such approaches run the risk of being too
early, just as trend-following techniques are often too late?
TD: Most of the time markets are in trading ranges and
price exhaustion techniques are easily applied. The times
when markets are trending can prove to be vexing, but a
market often provides clues to trending by recording steep
moves where price bars fail to overlap.
Countertrend Forex Trading With TD Sequential
Buy and sell Setups
……..
To “perfect” a buy setup, either the low of
Setup bar 8, the low of Setup bar 9 or a
subsequent price bar’s low must be
less than the lows of both Setup bars 6
and 7. Until that occurs, the anticipated
price “hiccup,” or reaction, is less
likely to occur.
A sell Setup is a series of at least nine
consecutive closes greater than the
close four price bars earlier. Prior to the
first bar of this series, a TD Price Flip
must occur to initialize the Setup –– i.e.,
the close of the bar immediately before
bar No. 1 of the prospective sell Setup
must be less than or equal to the close
four price bars earlier. If the Setup
series is interrupted at any time prior to
completion, the bar numbers are erased
and the process must start again.
Typically, when a sell Setup is completed
and perfected, price has a tendency
to at least react to the downside
or move sideways for a while. A sell
Setup is perfected when either the high
of Setup bar 8, the high of Setup bar 9 or
a subsequent price bar’s high is greater
than the highs of both Setup bars 6 and
7. Until that occurs, the anticipated
price reaction is less probable.
Countdown
Buy Countdown begins when a buy
Setup has completed (once the minimum
requirement of nine consecutive
closes less than the close four days earlier
is fulfilled). Beginning on the ninth
Setup bar, a process is applied that
compares the close of that price bar vs.
the low two bars earlier: If the close is
less than or equal to the low two price
bars earlier, then a Countdown is
recorded.
Just as a buy Setup series’ bars are
numbered, so too are bars in a
Countdown, except in a different color.
Once 13 valid Countdown bars have
occurred (note: Countdown bars do not
have to be consecutive), the downside
price momentum is likely to be
exhausted. Additionally, to ensure the
price action is sufficiently low relative
to the prior price action, the following
qualifier is used: The low of buy
Countdown bar 13 must be less than or
equal to the close of Countdown bar 8.
There are two events that cancel a
buy Countdown prior to completion:
The first occurs if, subsequent to the
completion of a buy Setup, a price
bar’s low and the prior price bar’s
close are both above the highest price
of the entire buy Setup series. In these
instances, the buy Setup is cancelled
and you must begin to look for a new
Setup series. The second cancellation
occurs when a contradictory sell Setup
appears before the completion of the
Countdown.
On the daily time frame, completed
Countdown “13s” coincide with a market’s
top or bottom approximately four
or five times a year. On shorter timeframe
charts, the number of Countdown
13s will increase commensurately.
Forecasting trends instead of
following them
The advantage of using TD Sequential
instead of conventional trend-following
methods is that you can buy into weakness
and sell into strength (and do so in
size). When following trends, entry
competition produces slippage and
price gaps that cut into performance.
Operating against the trend is often
difficult because it contradicts human
nature. However, these examples show
there are distinct advantages to doing
so, and TD Sequential is an indicator
designed specifically to accomplish
this goal
[DEW Note: Full Article Attached]
TD Aggressive Sequential
per a 2006 Bloomberg video, Tom Demark recommended using TD Aggressive Sequential and TD Aggressive Combo in order to “get in” more trades. You may not get in (or sell out) right at the bottom (or top) but it is still a low-risk entry or exit.
Description:
Normally the TD Countdown compares the Close to the Low or High (for Buy or Sell) 2 bars prior.
For TD Aggressive, compare the Low to Low, or High to High 2 bars prior. (ie. replace Close with Low or High)
Comments On TD Sequential Entry
DailyDeMark here… I want to make a comment that was made by Marie on the previous page. You absolutely must not trade the Setup 9 count based purely on the “perfection” setup. There is a 3rd requirement not discussed by anyone here: That requirement is that the current TD Setup must not break through the TDST line that was established by the previous TD Setup in the opposite direction.
I.E.
XYZ records a TD Sell Setup. The lowest low of that Setup period is $50/share – that puts the TDST price line at $50/share. Current price is $60 share. XYZ moves into consolidation mode and then shows weakness. A sell off occurs and a TD Buy Setup occurs. When the 9 bar closes, price is at $55 share. The new TD Setup (a Buy Setup) did not have sufficient momentum to break through to the downside of the TDST line at $50.
DeMark suggests that this is the only time you trade a Setup 9 count. He would suggest that there will be a reversal to the upside.
Remember, the TD Sequential is not only a price analyzer but a real-time momentum indicator. That is why you cannot trade a 9 count only. A TD Setup demands a high degree of momentum,an amount of momentum that rarely is followed by an immediate reversal. If you look at the NASDAQ ETF QQQQ since late May, there have been three completed setups. All of them were immediately followed by a very brief period of consolidation or weakness… followed immediately by another Setup. You would have lost money each time.
One more note… do not trade against the Sequential trend that is a factor of five above your trading time frame. If you are trading daily bars, check the trend on Weekly bars. If you are trading 15 minute bars, check the hourly bars for the trend. Do not trade against the trend. Common sense.
via Forex-Strategies-Revealed
The Demark Sequential Indicator
via “IMPRESSIVE SIGNALS FROM DEMARK”
THE TECHNICAL ANALYST
September/October 2004
“I recall that a recent backtest of the Sequential signals showed them to be around 70% accurate. DeMark is essentially a risk-reward strategy and its stoploss positioning means that even when the indicators occasionally underperform, losses are cut to a minimum. In my experience, the TD Sequential Indicator is more than 70% reliable; it is closer to 90%.” – Kurt Magnus, head of foreign exchange sales at Westpac bank in London
The DeMark Sequential Indicator
Magnus uses Bloomberg charts whose software automatically recognizes and displays TD Sequential Indicators as prices change from day to day. The Sequential is perhaps the most commonly used DeMark indicator and has an impressive record of identifying and anticipating turning points across the FX, bond, equity and commodity markets. Furthermore, the indicators provide signals not only on a daily, weekly
and monthly basis but also intraday. The Sequential Indicator identifies when a trend is becoming, or has become, exhausted. On daily charts, for example, DeMark identifies precisely which day to enter into a new position or liquidate an existing one. This total absence of ambiguity with regard to market timing makes the Sequential stand out. Using the indicator does require a leap of faith however, as signals often appear prematurely. As such, a buy signal may appear before a downtrend has completed so the trader may have a nervous ride before the market finally turns. Magnus warns that it is crucial the indicator is properly understood. “Unless you understand exactly the maths behind the signals, you can make costly errors. There are only two guys in the London FX market who can explain these signals with authority. Jason Perl at UBS in London and I often talk to make sure we get it spot on.”
Setups
The TD Sequential Indicator consists of two patterns, a TD Setup and a TD Countdown. Setups are the shortest in duration, lasting for exactly nine price bars when completed. For example, a buy Setup exists when there have been nine consecutive price bars in which each bar’s close is lower than the close four price bars earlier. When a price bar closes below that of four price bars previously a ‘1’ appears below the bar. If the next price bar also closes below that of four bars earlier a ‘2’ appears and so on. These appear in Figure 2 in green, a chart of EUR/USD from February to May ’04. If before price bar 9 is reached a price bar fails to close below that of four bars previously then the Setup is abandoned and the numbers are automatically deleted. Once nine consecutive price bars have been completed the trader will be looking for a “perfected” Setup; one that is now valid for trading. A buy Setup is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Perfected sell Setups look for a high of either price bar 8 or 9 that is greater than the highs of both price bars 6 and 7. Figure 2 clearly shows perfected sell Setups in February and April marked with a red arrow.
Countdowns
A TD Countdown occurs after a completed Setup. A buy Countdown consists of thirteen price bars whose close is lower than or equal to the low two bars earlier. The corresponding numbers appear below the price bar. Unlike the Setup, a Countdown doesn’t have to consist of consecutive days. The Countdown is a bigger pattern than the Setup in that it can take months for a Countdown to form and often signifies a larger market move once the trend changes. Like the Setup, the Countdown also has “perfection” criteria. For a buy Countdown this requires that the low of price bar 13 be less than or equal to the close of price bar 8. Similarly, sell perfections require that the high of price bar 13 be greater than or equal to the close of price bar 8.
Note: Mistake under ‘TD Countdown – Sell Signal’: should read: “13 price bars where each close is greater than or equal to the HIGH 2 price bars earlier”
Applying TD Sequential To Intraday Charts
By DeMark, Tom
Publication: Futures (Cedar Falls, Iowa)
Date: Tuesday, April 15 1997
Originally designed for daily analysis, Tom DeMark’s TD Sequential indicator also works for intraday analysis. It is effective for especially targeting high- and low-risk entry points.
When I entered the investment business more than 25 years ago, volume on the New York Stock Exchange was approximately 6 million shares a day. Stock quotations appeared on a ticker tape, and futures quotes were on a large wallboard.
I did my market timing research by poring over weekly printed charts with a magnifying glass. Analysis was limited to conclusions regarding daily price activity because intraday price data were not available until the 1980s. As such, once it became available, I was pleasantly surprised to see that the TD Sequential worked on intraday price movements as well.
My research showed price movement of most markets displayed a natural rhythmic motion that could be measured by a combination of factors that either compared closing price levels or closing prices with extreme price highs and lows. Simply put, TD Sequential consists of three distinct stages: setup, intersection and countdown.
Setup
The initial setup phase consists of a series of at least nine consecutive closes less than the close four trading bars earlier for a buy setup and at least nine consecutive closes greater than the close four trading bars earlier for a sell setup. Setup establishes the environment or the context for the market and determines whether a trader should be looking to buy or sell the market.
I have added a caveat to the phrase “The trend is your friend.” It is “…unless the trend is about to end.” At that point it is not prudent to trade with the trend. Most of my market timing indicators, as is the TD Sequential, are designed to anticipate trend reversals.
Intersection
Once the setup series has been defined, I review price activity beginning on day 8 of setup to determine whether the setup process has been perfected and countdown can begin. To accomplish this, I require a phase I refer to as intersection.
Intersection requires the high of bar 8 of a buy setup be greater than or equal to the low of bars 5, 4, 3, 2 or 1 of the buy setup. If this requirement is not met, then the high of bar 9 of the buy setup must be greater than or equal to the low of buy setup bar 6 or any other price bar back to bar 1 of the buy setup. If this is not fulfilled, then each successive price bar is compared until its high is greater than or equal to the low of the price bar three or more price bars earlier back to bar 1 of the buy setup.
For intersection to occur in a sell setup, the low of setup price bar 8, 9 or the first subsequent bar must be less than or equal to the high three or more price bars earlier all the way back to bar 1 of the sell setup.
Intersection is a required step because it assures that the rate of decline or advance is decelerating sufficiently to enter the final phase, which is countdown.
Countdown
TD Sequential buy countdown consists of a series of 13 successive closes less than or equal to the low two price bars earlier. Once that has been accomplished, the market generally is in a low-risk buy entry zone. The TD Sequential sell countdown consists of a series of 13 successive closes greater than or equal to the high two price bars earlier. This generally indicates a low-risk sell entry zone.
Whereas setup requires the price comparisons be maintained consecutively, countdown does not apply such restrictions. To prevent high-level, low-risk buy countdown 13 entries and low-level, low-risk sell countdown 13 entries, I’ve installed the requirement that day 13 of a buy countdown be postponed until it occurs below day 8 of the buy countdown and, conversely, that day 13 of a sell countdown be postponed until it occurs above day 8 of the sell countdown. “Recycling” is a concern that could arise in a strongly trending market. Generally speaking, if a subsequent setup occurs prior to completion of countdown, then a new countdown process must begin.
TD Sequential in action
The TD Sequential is versatile over various time frames. The charts of the March 1997 S&P 500 Index futures contract on Jan. 23 (“Market fall,” left) show the contract declined from approximately 800 to 773, roughly a 27-point collapse, in 1 1/2 hours.
To demonstrate the sensitivity of the TD Sequential to identify the exact high and low on the chart to the minute, I’ve applied it to this time period. The respective sell count-down 13 and buy countdown 13 are not levels of entry; rather, they accurately define levels of low-risk entry. “Market fall” provides you with a perspective of how the price top and bottom were formed.
“Closer look #1 and #2” (left) magnifies the sell setup period and the buy setup period to illustrate the simplicity in calculating the respective price setups and countdowns. Note that, in the case of the market advance, I insert both setup and countdown numbers above the price bar and, conversely, in the case of a market decline, the numbers appear beneath the respective price bars.
Furthermore, it is apparent in “Market fall” that, coincident with the completion of the ninth bar of the sell setup (a series of nine or more consecutive closes greater than the close four price bars earlier), price has a tendency to retrace. A similar occurrence is observed at 1:45 p.m. when the ninth price bar of sell setup is recorded.
Buy setups demonstrate a similar behavior only in reverse. At approximately 1:15 p.m. the ninth price bar of buy setup (a series of nine or more consecutive closes less than the close four trading bars earlier) was recorded, and prices subsequently rallied. A similar event took place at 2:10 p.m.
However, not every setup elicits such a response, as you can readily see at 2:35 p.m. when the ninth bar of a buy setup failed to generate any price movement to the upside.
To demonstrate the application of TD Sequential to other markets and time periods, I’ve included a five-minute chart of May 1997 coffee futures in “Coffee TD Sequential” (right), which identifies a TD Sequential high-risk buy countdown completion just prior to the Feb. 20 early morning price peak before a 10-point plus decline.
Also, in “Longer count” (right), the March S&P 500 Index futures chart on a 10-minute basis, I identify the TD Sequential nine-13 high-risk buy indication on Feb. 19, coincident with the price peak.
Although TD Sequential has worked effectively on a daily basis for more than two decades, only within the last five years has it become apparent that this technique can be applied to intraday price charts as well. Because it originally was designed to be applied to longer time periods, its ability to identify high- and low-risk entry zones on an intraday basis is a testimony to its adaptability and dynamic design.
Tom DeMark is president of Market Studies Inc., a provider of indicator software for most major quote vendors, a consultant to large fund managers and author of The New Science of Technical Analysis
