Aaron Armstrong

I thought it would be a good idea to review some of the key analytical techniques of Tom DeMark since I use his research so extensively in my own trading and in the research you find here at Research Lab Trading. This will be a mini-tutorial on the TD Sequential and Countdown, the TD Setup Trend, buy and sell triggers and price projections. All of this material is from New Market Timing Techniques Thomas DeMark, published 1997.

The TD Sequential is the foundation of the market structure and market exhaustion research, it seeks to identify two things:

The corrective phase of a trend can generally be identified by the following: "If subsequent to the completion of a buy Setup and Countdown, all closes of the current sell Setup fail to exceed the extreme intraday high of the most recent buy setup or, if subsequent to the completion of a buy Setup and Countdown, all closes of the current buy Setup fail to exceed the extreme intraday low of the most recent sell Setup, generally this failure suggests the completion of a market correction or reaction and is a harbinger that the prevailing price trend is likely to resume."

This results in a counter trend correction and the resumption of the overall trend.

The green dashed line is the TDST support (see section below on subject) and notice how the sell Setup "9" called the top of the first bounce and the buy Setup "9" correctly called the reversal of the pullback and the start of a new and rather vigorous price trend to the upside.

As you can see, the failure of a market to exceed the lowest low of prior sell Setup has tremendous pullback trading potential (in the case of a buy Setup). This is an often overlooked component of the TD Sequential.

Perfection

In order for a Setup to be perfected the following must be met: The low of bar "9", for a buy setup, must be below the low of bar "6". If this is not met the low will usually be taken out within 3 days. Reverse this requirement for sell Setups.

This perfection requirement ensures that we are truly buying or selling price exhaustion points and not the price flips that often occur within Setups.

Cancellation

"If at anytime prior to the last day of a buy Countdown, a closing price that exceeds the highest high of the most recent buy Setup or if at anytime prior to the last day of the sell Countdown, a closing price exceeds the lowest low of the most recent sell Setup, then the active Setup is cancelled."

Prices that rally above the active Setup indicate that exhaustion is not present and a new Setup must then develop before we can take action.

A Setup can also be cancelled by a "reverse Setup." For instance, an existing sell Countdown or Setup, if met by a full buy Setup, will be canceled.

TD Setup Trend

TD Setup Trend, or TDST, is a lesser known but very valuable component of DeMark's research. TDST seeks to identify breakouts or breakdowns and support and resistance levels.

"...uses as a reference the highest high or the buy Setup, and once prices close above this level and follows through by recording a higher high, the upside move should continue through a sell Setup and Countdown or until the trend is reversed by recording a close below the lowest low of a subsequent sell Setup.

Prices exceeded the TD Setup Trend level and proceeded higher

Notice how the low the sell Setup is support (dashed green line) and is not broken by the low of the buy Setup. This sets up a trend reversal. Now notice how TDST resistance (dashed red line) serves as resistance but is broken to the upside (green arrow), this identifies a successful TDST breakout and indicates that prices should continue higher.

Buy, Sell and Price Objectives

Understanding the Setups, breakout levels and cancellation rules is great but knowing when to buy and sell determines how successful your use of this method will be.

DeMark has a couple simple guidelines for buys:

Stop Losses

For a long, find the lowest low of the Setup or Countdown and take the difference of that bars high to low or previous close to low, whichever is greater, then subtract that difference from the lowest low of the Setup/Countdown-this is the stop loss point.

Price Objectives

DeMark uses multiples of .0556 for upside price objectives and .9444 for downside objectives, these are known as TD Trend Factors. Multiply the close of the low you are referencing by 1.0556 to find the first price objective, by 1.112 for the second and so on. The same applies for the downside. Multiply .9444 by the close of the high you are referencing for the first price objective and .892 for the second and so on.

I use these price objectives regardless of the method of analysis-you don't have to use a TD Sequential to use these objectives.

The only requirement is that the previous move from a recent high to a recent low be at least 5.56%.

There you have it, some of the basics of Tom DeMark's market timing and market structure research.

(where buy Setups and Countdowns are mentioned just reverse the highs with lows etc. for sells)

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