Tom Demark Sequential

Books which I have found and have read:
New Market Timing Techniques - Thomas R. Demark. Written by Tom Demark itself but it is difficult to read and understand. I have needed several months to understand the idea and to summarize the information bellow.... and than I found the following book:
DeMark INDICATORS - Jason Perl. A great book about Demark indicators easy to read and understand. The theory is presented in a way which is very easy to understand. I recommend you to read it. But Murphy's law I have found it one week later... when I already had the information which I have needed:)

The post is not intended to be a comprehensive guide how to trade using Tom Demark's technique there is books about that. In "DeMark INDICATORS by Jason Perl" for example you can find the info - when trading signal is appearing/entry level/stop level etc. and much more TD indicators and techniques.
The post is intended to be a quick reference so we do not need to look for the rules each time on Internet or in the books:) I will post my thoughts and some charts which will help you to understand how to apply Tom Demark's method in the practice. I am not a Pro but I hope that the post will be a good starting point for you to start using TD Sequential in real trading.


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TD Sequential indicator consist of two components. TD Setup is the first one and it is a prerequisite for the TD Countdown – the second component.

1.TD Setup
TD Setup compares the current close with the corresponding close four bars earlier. There must be nine consecutive closes higher/lower than the close four bars earlier.

TD Buy Setup - prerequisite is a bearish price flip, which indicates a switch from positive to negative momentum.
– After a bearish price flip, there must be nine consecutive closes, each one less than the corresponding close four bars earlier.
– Cancellation - If at any point a bar closes higher than the close four bars earlier the setup is canceled and we are waiting for another price flip
- Setup perfection – the low of bars 8 or 9 should be lower than the low of bar 6 and bar 7 (if not satisfied expect new low/retest of the low).

TD Sell Setup - prerequisite is a bullish price flip, which indicates a switch from negative to positive momentum.
– After a bullish price flip, there must be nine consecutive closes, each one higher than the corresponding close four bars earlier.
– Cancellation - If at any point a bar closes lower than the close four bars earlier the setup is canceled and we are waiting for another price flip
- Setup perfection – the high of bars 8 or 9 should be greater than the high of bar 6 and bar 7 (if not satisfied expect new high/retest of the high).

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2. TD Countdown - after a setup is finished the countdown can begin from bar 9 of the setup.
TD Countdown compares the current close with the low/high two bars earlier and you count 13 bars. Unlike the Setup, the Countdown doesn’t have to be a sequence of 13 consecutive price bars. If it is interrupted you just do not count the bars and when it resumes you continue counting further.

TD Buy Countdown starts after the finish of a buy setup. The close of bar 9 should be less than the low two bars earlier. If satisfied bar 9 of the setup becomes bar 1 of the countdown. If the condition is not met than bar 1 of the countdown is postponed until the conditions is satisfied and you continue to count until there are a total of thirteen closes, each one less than, or equal to, the low two bars earlier.
Countdown qualifier - The low of Countdown bar thirteen must be less than, or equal to, the close of Countdown bar eight.
Countdown cancellation:
- A sell Setup appears. The price has rallied in the opposite direction and the market dynamic has changed.
- close above the highest high for the current buy Setup (break of TDST for the current Setup)
- recycle occurs ( new Setup in the same direction and recycle activated )

TD Sell Countdown starts after the finish of a sell setup. The close of bar 9 should be greater than the high two bars earlier. If satisfied bar 9 of the setup becomes bar 1 of the countdown. If the condition is not met than bar 1 of the countdown is postponed until the conditions is satisfied and you continue to count until there are a total of thirteen closes, each one greater than, or equal to, the high two bars earlier.
Countdown qualifier - The high of Countdown bar thirteen must be greater than, or equal to, the close of Countdown bar eight.
Countdown cancellation:
- A buy Setup appears. The price has rallied in the opposite direction and the market dynamic has changed.
- close below the lowest low for the current sell Setup(break of TDST for the current Setup)
- recycle occurs (new Setup in the same direction and recycle activated)

Aggressive TD Sequential – the difference is the Countdown phase. You compare high/low (not the close ) with the high/low two price bars earlier.
Aggressive Sequential always produces buy and sell signals before Sequential does.

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3. TD Combo
TD Combo is better when you have sharp directional moves, because it requires only thirteen price bars from start to finish compared to TD Sequential which needs at least 22 bars. The criteria for a Setup within TD Combo are the same with those required for a Setup within TD Sequential. The difference is that the count starts at bar 1 of the setup and not from bar 9 and TD Combo requires four conditions to be satisfied simultaneously.

Requirements for a TD Combo Buy Countdown
- close lower or equal than the low 2 trading days earlier.
- The low of a countdown day should be less than the previous "trading day‘s" low
- The close of a countdown day should be less than the previous "trading day‘s" close
- The close of a countdowns day should be less than the previous "countdowns day‘s" close
- bars 11,12,13 each one should just close successively lower and the other rules above are not applied

Requirements for a TD Combo Sell Countdown
- close higher or equal than the high 2 trading days earlier.
- The high of a countdown day should be greater than the previous "trading day‘s" high
- The close of a countdown day should be greater than the previous "trading day‘s" close
- The close of a countdowns day should be greater than the previous "countdowns day‘s" close
- bars 11,12,13 each one should just close successively higher and the other rules above are not applied

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Bearish Price Flip - occurs when the market records a close greater than the close four bars earlier, immediately followed by a close less than the close four bars earlier.
Bullish Price Flip - occurs when the market records a close less than the close four bars before, immediately followed by a close greater than the close four bars earlier.

TDST level – this is the highest high(usually the high of bar 1) for a buy setup or the lowest low(usually the low of bar 1) for sell setup, also called true high/low for a Setup.
- If a move cannot close above or below the TDST level of the most recently completed Setup in the opposite direction that means the momentum is weak and this is just a corrective move.
- If a move closes above/below the TDST level of the most recently completed Setup in the opposite direction that means that the momentum is strong enough and the price should then continue in that direction , and with high probability a TD Countdown will be completed before a reversal occurs.

True low/True high – is the lowest and the highest point for a setup, BUT including gaps before bar 1 and the days after the 9-th bar, qualifying for a setup bar.

Sell zone/Buy zone after finished TD Sequential – find the bar which records the highest high/lowest low for the countdown, find the range of the bar plus gaps and project it from the high/low of the bar. After finished TD Sequential/Combo the price should make a top in this zone not later than 12 price bars after bar 13 for the countdown. If the market breaks this level the signal is negated and we are witnessing renewed strength.

Setup Recycle - A second setup appears in the same direction before/on/after a Countdown - that usually means strength. The question is recycle and start a new Countdown? (there must be a price flip to divide the two setups or the first just continuous)
Compare the size of the two setups. The size is the difference between the true high and true low of a setup.
- if the second setup is equal or greater than the previous one , but less than 1.618 times its size, then Setup recycle will occur – the trend re-energize itself. Whichever Setup has the larger true range will become the active Setup.
- ignore setup recycle if the new setup is smaller or 1.618 times and more, bigger than the previous one – most probably price exhaustion area.

TD Sequential Reinforcement - 9-13-9 sequence
After a Buy Countdown the market temporarily trades higher and produces a Price Flip and subsequently a TD Buy Setup appears, this is known as a TD Sequential 9-13-9 Buy Count.
Requirements for a valid Sequential 9-13-9 Buy Count:
- The Buy Setup must not begin before or on the same price bar as the completed Buy Countdown
- The second Buy Setup must be preceded by a bullish Price Flip
- There must be no completed Sell Setup prior to the appearance of the Buy Setup.

After a Sell Countdown the market temporarily trades lower and produces a Price Flip and subsequently a TD Sell Setup appears, this is known as a TD Sequential 9-13-9 Sell Count.
Requirements for a valid Sequential 9-13-9 Sell Count:
- The Sell Setup must not begin before or on the same price bar as the completed Sell Countdown
- The second Sell Setup must be preceded by a bearish Price Flip
- There must be no completed Buy Setup prior to the appearance of the Sell Setup.

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P.S. There is special software which counts for you with a bunch of other TD indicators etc. If you want to trade using TD Sequential you should probably use such software and buy some books. I use TD Sequential in a combination with technical analysis and count by myself. That is good enough for me and the summary above is all I need.


So what should we do with all this bunch of 9's and 13's ?????

TD Sequential is a great tool for identifying trends, measuring momentum and spotting areas of price exhaustion.

I use TD Sequential as a complementary technique to technical analysis(TA) and that is my interpretation:
- Price flip indicates short term reversal of the momentum up<->down. Look at your charts if there is no reversal signs that means short term pullback and you can load more in the direction of the trend. Or you are expecting a reversal than a price flip is a great way to trigger an entry(take profits) for a new swing trade.
- The appearance of a TD Setup confirms strong momentum in it's direction. After a swing has begun, up or down, the appearance of a TD setup says the momentum is strong enough. It's absence is a valuable information too - the move is just a correction expect a resumption of the trend.
- Countdown 13 is the trending phase – when a setup has finished and a countdown has begun the market is in a trending phase. The odds are very high that the move will not finish before it records 13 in the corresponding direction, just watch out for a setup in the opposite direction. When a countdown has finished the price has reached an area of exhaustion watch out for a reversal.

As every technique it has it's weaknesses. I have not found answer in the books of the following questions:
- its called sell setup because the price is moving up and after a setup is finished you should sell - should I really sell? Should I expect a follow trough on the upside and the start of a countdown? - The answer which I found is watch if the setup has broken the TDST of the previous setup in the opposite direction. Not good enough for me.
- and when the countdown is finished should I sell or expect another 9/13.... usually you have a reversal after finished countdown but if you see the charts that is not always the case. The only hint which I have found is Sell zone/Buy zone - it's good enough, you have entry level,stop level and you know when you are wrong.

It's not so bad:) using TA you can solve this issues. And one thing in which TD Sequential is better than TA - the indicators can tell you the market is overbought but for how long can it stay overbought.... TA does not have the answer. TD sequential can tell you when the trend has reached exhaustion - when countdown 13 is finished.


Lets take a look at the charts.... I would say TD Sequential has pretty high success rate, if I am honest much higher than most oder indicators or techniques. I am not a pro applying TD indicators and probably some counts are wrong but combined with TA its a valuable tool for me. My overall score based on the charts bellow is TD Win:TD Loss 10:5 - not bad.
Oooo and notice that these are not charts specially selected for some book showing you when some method is working conveniently not showing you the charts when its not working:) These are just the SP500 charts for the last several years... this is happening now.

The charts are self-explanatory, I will comment what I think is interesting.....
- Aug-Oct 2011 huge drop, everybody were scared, bearish market will resume bla bla... I have said we will see lower low with divergence, first it was 18 month cycle low and second a bear market does not start with a "BANG". Nice... low but when? - When the count is finished:) 13 spot on the last bar for the decline TD Win:TD Loss 1:0
- Oct 2011 sharp rally has started so combo is your tool. When to expect a pullback so we can jump on the rally if you missed it or is it too late to jump on - 13 combo finished and spotted the top of this rally. TD Win:TD Loss 2:0
- corrective mess followed and it reached 8 of a setup - the decline into December. You can say that the cancellation of the buy setup failed to produce buy signal or say failed setup says this is just a correction and the trend resumes. I knew that the move will not finish with just one wave up and one day miss is not a drama so I would say a point for both sides TD Win:TD Loss 3:1 is fair enough.
- from mid December rally up and up and up - TD Sequential produced 9-13-9-13. This is the second problem which I have mentioned above - when it will be over on the first countdown after 9-13-9 reinforcement? I do not have an answer. But you must admit 13 countdown spotted the top and if you look at the weekly chart 13 combo spotted the top too so for me TD wins TD Win:TD Loss 4:1
- the summer correction produced 12 Combo bars.... again 1 day miss honestly how many indicators do you know which can spot the exact top or bottom? Point for both sides is fair enough TD Win:TD Loss 5:2

- again sequence 9-13-9-13. The move is a mess but a countdown finished just before the plunge lower - point for both camps TD Win:TD Loss 6:3
- combo and countdown finished on Friday 11.01.2013... the future will show if TD Sequential wins or loses :)

The weekly chart - pretty damn good :) in order of appearance:
- sequence 9-13-9-9 but you must admit every time finished before a correction so one point for both sides TD Win:TD Loss 7:4
- TD sequential finished TD Win:TD Loss 8:4
- TD combo finished TD Win:TD Loss 9:4
- TD buy setup finished - that is the first problem mentioned above. When a setup is finished should I expect a countdown or reversal? no answer but spotted the reversal - one point for both sides TD Win:TD Loss 10:5

Weekly review

Short term view - probably short term cool off next week.
Intermediate term view - There is no bearish signs for now so up is up. I think there is another 2-3 weeks before intermediate term top.

So sharp rally after another orchestrated drama... QE,debt ceiling,fiscal cliff and always the same results print more spend more - somebody surprised?
I was WRONG calling the end of the move. The problem is not that I was wrong that is part of the game called trading I am angry at me that I read the charts the wrong way... ok I was working all the time lets say I was tired:)

The question now is do we see replay of the QE3 drama from September - sharp rally for several days and reversal or we are in the middle of a rally and the next leg up has started.
- On the technical front the charts look bullish. Weekly chart(see chart three)- huge bar,the histogram is moving higher, MACD turning up at the zero line and the trend line, the price bounced of support,EMA50 and the trend line. The daily chart is bullish too - price,histogram and MACD are still moving up.
- The Market Breadth Indicators are bullish pointing up but the move is already mature as all indicators are in the overbought zone. But they could stay there for several weeks that is not a problem.
- Cycles - we are in the last 20 week cycle of a 4 year cycle and waiting for a 4 year low. So we should see intermediate term top soon.
- Tom Demark Sequential - daily chart 13 reached pullback is to be expected, weekly chart we are at week 10 from a countdown so another 2-3 weeks up are to be expected. We are near to an intermediate term top but not there yet.

When I asses the facts above I head two scenarios shown on the long term chart:
- the current one for a reversal now, which I am following for a long time. It is still valid there is no technical damages but the time is running out. We should see a reversal soon. It was the same story in September - I was expecting an intermediate term top and than ECB announcement, FED QE3 sharp rally for several days from 1400 to 1475 one final push stretched to the maximum.... and than a reversal. So I could not exclude this scenario.
- we are in a wedge, we saw already 1-2-3-4 and now we are in the middle of 5. That means we have more on the upside in the next 3-4 weeks and 1500 points on the SP500 at least.

Unbiased conclusion - the wedge scenario has more weight because of the technical picture, the other scenario is based on indirect evidence and at the moment we do not have any confirmation.
If you find this confusing I will tell you my trading strategy which is very simple - buy the next pullback. If the wedge plays out you make money, if the other scenario kicks in you make small gain(worst case small loss) on the upside and reverse short.... and you make money:)

TECHNICAL PICTURE
Short term - I think we will see a pullback next week. How deep will give us more information what to expect from the next move. Normal pullback should be 25 points like the previous ones which is ~1440, the middle trend line, support and EMA50 on the hourly chart.

Intermediate term - both scenarios are shown on the chart. Red 1-2-3-4-5 is the wedge scenario, yellow W-X-Y is a flat correction which is part of the green scenario and should mark the low of the 4 year cycle.

Long term - a better view of the big picture. Ending diagonal/wedge in red 1-2-3-4-5 we are in the middle of 5. Or a big sideway move (the green scenario) from W to X should be the end of a 4 year cycle with the last year of the cycle (April 2012 to the projected low Q1 2013) basically flat.
The irony is the bearish mid term scenario(green) is more bullish for the long term. As a trader I hope that this scenario will play out - it will offer us much more opportunities to make some money in both directions:). The other one... a lot of risk with this ending diagonal and multiple divergence on the MACD.

MARKET BREADTH INDICATORS
The Market Breadth Indicators are bullish but at overbought levels. They can stay there for several weeks and the indexes can move higher BUT the move is mature. I would not expect a rally for another two months and 10%+ gains rather 3-4 weeks and another 5%.
McClellan Oscillator - divergence erased, healthy move... no troubles here.
McClellan Summation Index - bullish on buy...
Weekly Stochastic of the Summation Index - says we are near to the end of this swing not the beginning... but no sell signal for now.
Bullish Percentage - bullish on buy...
Percent of Stocks above MA50 - very stretched to the upside around 90. It will take same time to reverse probably with divergences.
Fear Indicator VXO - in the danger zone bellow 14 but it could stay there for a while. There is no divergences for now...

HURST CYCLES
I moved the low of the 20 day cycle. The strong move of the low and the new minor high suggests that a new 20 day cycle has started on Monday - currently at day 4. At least a week at this levels before we see the top of this daily cycle.

The big picture - currently at week 7 of the last 20 week cycle of the 4 year cycle. Something on the downside should start very soon.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
This week SP500 has finished 13 combo and 13 countdown.... lets see what happens next, probably a pullback.

The weekly shows Countdown and Combo at 10. This will fit perfect with the 1-2-3-4-5 wedge scenario finishing countdown 13 in the next 2-3 weeks.
The T-theory says the same another 2-3 weeks of strength - after a period of weakness follows a period of strength with at least the same duration.