An
introduction to Tom DeMark Indicators written by Jeffrey
Tennant, Author of "The Mejt System".
Examples
of Tom DeMark Sequential and Combo Indicators.
In the late 1970s
Tom DeMark devised some technical indicators which he called
the TD
sequential and TD combo. These indicators successfully showed the areas
in which
the market was sufficiently oversold for one to expect a bottom to
form. Demark used the same rules, applied in reverse, to indicate the
area of a potential
market top.
Fig. DM1 shows a
sequential buy signal at the OCT 2011 low.
Nine bars of a buy set-up printed. The TDST line represented the true
range of bar 1 of set-up rather than the trend high. The stretched out
look of set-up was ideal. The close of either bar 8 or bar 9 qualified
the set-up as perfect. Note the white color.
Thirteen bars of countdown then printed, which are colored in blue.
Note especially that anyone who went long after the signal was given at
bar 13 would have had to sit through a sickening decline before being
rewarded.
In this chart, you will see that the previous bar to the actual Oct low
closed lower and may ask why did it not trigger a stop? The
stop
loss is based on the lowest bar of the pattern and as we can see,
this was the day after bar 1 of countdown in August.
However,
using DeMark's rules, the decline in October did not fall low enough to
trigger
the stop loss.
The chart also features a sell set-up. One should expect resistance at
the TDST line. Overcoming that resistance typically leads to higher
prices.
Tom DeMark Indicator Examples: Fig DM2
Fig. DM2 shows the 9 bars of a sell set-up. Thirteen bars of countdown
printed, but the market continued higher.
The standard rule says that when 18 bars of countdown have printed, the
pattern has failed. (And when sequential patterns fail, they fail big.)
However, a friend of DeMark’s, who told me I could publish this
information, says that DeMark has found 22 bars of countdown (and not
18) that are necessary to say the signal failed.
The stop loss based on price was violated, but by less than 1%; the
rules state that the stop is to be interpreted loosely.
Tom DeMark Indicator Examples: Fig DM3
Fig. DM3 showed that those people with patience were rewarded.
Tom DeMark Indicator Examples: Fig DM4
Fig. DM 4 shows a series of DeMark sell signals which failed. Note in
November that bar 8 of countdown was less than bar 5 of countdown (blue
numbers). We can also see in January that the 9 bars of set-up (yellow)
were not stretched out. There is a higher risk of failure when either
of these conditions are present. However, a failure is not guaranteed
and the signals still work a decent percentage of the time.
Tom DeMark Indicator Examples: Fig DM5
Fig.DM5 shows combo (green) and sequential (blue) buy signals at the
mid-year 2012 bottom. Each “x” means that the bar did not obey all the
rules exactly, which is allowed. This illustrates the principle that
the rules for countdown are flexible, while those for set-up are not.
Tom DeMark Indicator Examples: Fig DM6
Fig.DM6 is a monthly chart. The rules were developed for daily bars,
but they also work for bars of other durations. The longer the duration
of the bar, the more valid the signal. I have found bars as small as 15
minutes to be useful. Bars smaller than that have too many failures
when considered by themselves. However, when a DeMark signal on a
larger time frame is given, looking for sequential or combo signals on
bars as small as one minute can help fine tune one’s entry.
The chart shows a combo sell signal in green. Failure to undercut the
TDST line showed the bulls were not done. At the chart’s end there is a
sequential sell signal in blue which remains active. There is
resistance at a TDST line from 2008; it extends to one bar past the
line.
by Jeffrey
Tennant Author: The
Mejt System, A new tool for day trading the S&P 500
John Murphy Video (90 Min)
Let John Murphy guide you through his thought process in selecting
markets to trade, in this Free 90 min video. This classic video is
still one of the most insightful you are ever going to see on investing
and trading.
Among Other
Free Videos Available
Using
Pattern Probability to Trade with the Trend: Curtis Arnold
