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00_Perl_FM.indd28/6/089:47:50AM PraiseforDeMarkIndicatorsbyJasonPerl“TomDeMark,themanwhoseworkinspiredthisbook,isaunique,interesting,andofttimesiconoclastictechnicalanalyst.Simplyput,hethinksaboutthemarketsdifferentlyfromthewayyouorIdo.Sowhyshouldyoureadthisbook?Because,havingreadit,youwillalmostcertainlythinkaboutthemarketsandtechnicalanalysisdifferently.”—JohnBollinger,CFA,CMT,www.BollingerBands.com“JasonPerlhastakentheplaybookfromthemarket’sJohnWooden,TomDeMark,andtranslateditengaginglyinaformatthattradersofalllevelswillappreciate.Asonewhohasusedtheseindicatorsformorethantwentyyears,ItooamappreciativeofJason’sclarity.”—PeterBorish,ChairmanandCEO,ComputerTradingCorporation“JasonPerlhascreatedatradingprimerthatwillhelpboththeprofessionalandthelaymaninterprettheDeMarkindicators,whichIbelieverepresentthemostrobustandpowerfulmethodstotracksecuritiesandestablishtimelyinvestmentpositions.ThinkofDeMarkIndicatorsastheRosettastoneofmarket-timingtechnology.”—JohnBurbank,FounderandCIO,PassportCapital“Havingobservedhismarketcallsrealtimeovertheyears,IcansaythatJasonPerl’sapplicationoftheDeMarkindicatorsdistinguisheshisworkfromindustrypeerswhenitcomestomarkettiming.Thisbookdemonstrateshowtraderscanbenefitfromhisinsight,usingthestudiestoidentifytheexhaustionofestablishedtrendsortheonsetofnewones.Whetheryou’refundamentallyortechnicallyinclined,Perl’sDeMarkIndicatorsisaninvaluabletradingresource.”—LeonG.Cooperman,Chairman,OmegaAdvisors“JasonPerlisthetrader’stechnician.DeMarkindicatorsareadifficultsubjectmatter,butJasonshowssimplyhowthetheorycanbeappliedpracticallytomarkets.Whetheryou’reday-tradingortakingmedium-termpositions,usingtheapplicationscanonlybeofincreasedvalue.”—DavidKyte,Founder,KyteGroupLimited00_Perl_FM.indd18/6/089:47:47AM 00_Perl_FM.indd28/6/089:47:50AM DEMARKINDICATORS00_Perl_FM.indd38/6/089:47:56AM RelatedtitlesalsoavailablefromBloombergPressBLOOMBERGMARKETESSENTIALS:TECHNICALANALYSISFibonacciAnalysisbyConstanceBrownDeMarkIndicatorsbyJasonPerlOptionStrategiesforDirectionlessMarketsbyAnthonyJ.SalibawithJosephC.CoronaandKarenE.JohnsonTradingOptionGreeksbyDanPassarelliBreakthroughsinTechnicalAnalysiseditedbyDavidKellerTradingETFsGaininganEdgewithTechnicalAnalysisbyDeronWagnerNewInsightsonCoveredCallWritingbyRichardLehmanandLawrenceG.McMillanNewThinkinginTechnicalAnalysiseditedbyRickBensignorAcompletelistofourtitlesisavailableatwww.bloomberg.com/booksAttentionCorporationsThisbookisavailableforbulkpurchaseatspecialdiscount.Specialeditionsorchapterreprintscanalsobecustomizedtospecifications.Forinformation,pleasee-mailBloombergPress,press@bloomberg.com,Attention:DirectorofSpecialMarkets,orphone212-617-7966.00_Perl_FM.indd48/6/089:47:59AM DEMARKINDICATORSJasonPERLFOREWORDBYTHOMASR.DEMARKBLOOMBERGPRESSNEWYORK00_Perl_FM.indd58/6/089:48:07AM ©2008byUBSAG.Allrightsreserved.ProtectedundertheBerneConvention.PrintedintheUnitedStatesofAmerica.Nopartofthisbookmaybereproduced,storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofthepublisherexceptinthecaseofbriefquotationsembodiedincriticalarticlesandreviews.Forinformation,pleasewrite:PermissionsDepartment,BloombergPress,731LexingtonAvenue,NewYork,NY10022orsendane-mailtopress@bloomberg.com.BLOOMBERG,BLOOMBERGANYWHERE,BLOOMBERG.COM,BLOOMBERGMARKETESSENTIALS,BloombergMarkets,BLOOMBERGNEWS,BLOOMBERGPRESS,BLOOMBERGPROFESSIONAL,BLOOMBERGRADIO,BLOOMBERGTELEVISION,andBLOOMBERGTRADEBOOKaretrademarksandservicemarksofBloombergFinanceL.P.(“BFLP”),aDelawarelimitedpartnership,oritssubsidiaries.TheBLOOMBERGPROFESSIONALservice(the“BPS”)isownedanddistributedlocallybyBFLPanditssubsidiariesinalljurisdictionsotherthanArgentina,Bermuda,China,India,Japan,andKorea(the“BLPCountries”).BFLPisawholly-ownedsubsidiaryofBloombergL.P.(“BLP”).BLPprovidesBFLPwithallglobalmarketingandoperationalsupportandservicefortheseproductsanddistributestheBPSeitherdirectlyorthroughanon-BFLPsubsidiaryintheBLPCountries.Allrightsreserved.Thispublicationcontainstheauthor’sopinionsandisdesignedtoprovideaccurateandauthoritativeinformation.Itissoldwiththeunderstandingthattheauthor,publisher,andBloombergL.P.arenotengagedinrenderinglegal,accounting,investment-planning,orotherprofessionaladvice.Thereadershouldseektheservicesofaqualifiedprofessionalforsuchadvice;theauthor,publisher,andBloombergL.P.cannotbeheldresponsibleforanylossincurredasaresultofspecificinvestmentsorplanningdecisionsmadebythereader.Thisbookhasbeenpreparedbyagroup,subsidiaryoraffiliateofUBSAG(“UBS”).Ithasnoregardtothespecificinvestmentobjectives,financialsituationorparticularneedsofanyspecificrecipient.Thisbookisbasedoninformationobtainedfromsourcesbelievedtobereliablebutnoindependentverificationhasbeenmade,norisitsaccuracyorcompletenessguaranteed.Thisbookispublishedsolelyforinformationalpurposesandisnottobeconstruedasasolicitationoranoffertobuyorsellanyfinancialinstruments.OpinionsexpressedhereinaresubjecttochangewithoutnoticeandUBSisundernoobligationtoupdateorkeeptheinformationcurrent.ThisbookmaynotbereproducedordistributedinanymannerwithoutthepermissionofUBS.Firsteditionpublished200813579108642LibraryofCongressCataloging-in-PublicationDataPerl,Jason.DeMarkindicators/JasonPerl;forewordbyThomasR.DeMark.—1sted.p.cm.Includesindex.Summary:“TomDeMark,creatorofthewidelyknownandrespectedDeMarkindicators,servedasmentortoauthorJasonPerl.Perldefinesandexplainshowtheindicatorsbringasuccessfultradingdecisiontoconclusion,andoffersaggressiveorconservativealternativeindications.WithachartorgraphicexplainingeachindicatorandaforewordbyTomDeMark”—Providedbypublisher.ISBN978-1-57660-314-71.Investmentanalysis.2.Stockpriceforecasting.3.Financialinstruments—Prices—Forecasting.I.Title.HG4529.P4752008332.6392042—dc22200803030500_Perl_FM.indd68/6/089:48:07AM ContentsForeword,byTomDeMarkxvAcknowledgmentsxixIntroductionxxiAuthor’sNotexxvAboutDeMarkIndicatorTrademarksxxvii1TDSequential:DefiningtheTrendandIdentifyingExhaustionPoints1TDSetup2BearishTDPriceFlip2TDBuySetup3InterruptionofaTDBuySetup4CompletionoftheFirstPhaseofTDSequential4TDSellSetup4BullishTDPriceFlip4TDSellSetup4InterruptionofaTDSellSetup4UsingTDSTLevelstoDeterminetheUnderlyingTrendBias5TDSequentialvs.MoreConventionalMomentumIndicators6TDSetupScenarioI:Consolidation/Reversal6TDSetupScenarioII:ConfirmedTrendExtension8TDBuySetup“Perfection”9TDBuySetup“Perfection”11TradingaTDBuySetup12Perl’sRulesforTradingTDBuySetupsObjectively13RiskManagement:CalculatingtheTDRiskLevelforTradingaTDBuySetup14TDSellSetup“Perfection”1400_Perl_FM.indd78/6/089:48:08AM TradingaTDSellSetup14Perl’sRulesonWhentoInitiateaShortPositionFollowingaCompletedTDSellSetup16RiskManagement:CalculatingtheTDRiskLevelforaTDSellSetup17TDSetupvs.TDSequentialCountdown17ToInitiateTDBuyCountdown17ToCompleteaTDBuyCountdown19TDBuyCountdownCancellation21FiltersThatCancelaDevelopingTDBuyCountdown21TDBuyCountdownCancellationandRecycleQualifiers21TDBuyCountdownCancellationQualifierI21TDBuyCountdownCancellationQualifierII(aTDBuySetupWithinaTDBuySetup)22TDBuyCountdownRecycleQualifier22AnRWillAppear22EnteringaLongPosition24TwoWaystoEnteraLongPosition24AlternativeStrategyforEnteringaLongPosition25RequirementsforaTDCamouflageBuy25RequirementsforaTDClopBuySignal25RequirementsforaTDClopwinBuySignal26RequirementsforaTDOpenBuySignal26RequirementsforaTDTrapBuySignal26TDBuyTerminationCount26RiskManagement:ForaTDBuyCountdown26FrequentlyAskedQuestions28RequirementsforValidationofaTDSequential9-13-9BuyCount29RiskManagement:ForTDSequential9-13-931TDSellCountdown31RequirementforaTDSellCountdown31ToCompleteaTDSellCountdown31TDSellCountdownCancellation34FiltersThatWillCancelaDevelopingTDSellCountdown34TDSellCountdownCancellationandRecycleQualifiers34TDSellCountdownCancellationConditionI34TDSellCountdownCancellationConditionII(aTDSellSetupWithinaTDSellSetup)35TDSellCountdownRecycleQualifier35EnteringaShortPositionFollowingaCompletedThirteenTDSequentialSellCountdown3500_Perl_FM.indd88/6/089:48:09AM AlternativeStrategyforEnteringaShortPosition36TDCamouflageSellSignalRequirements37TDClopSellSignalRequirements38TDClopwinSellSignalRequirements38TDOpenSellSignalRequirements38TDTrapSellSignalRequirements38TDSellTerminationCount38RiskManagement:ForaTDSellCountdown39FrequentlyAskedQuestions39RequirementsforValidatingaTDSequential9-13-9SellCount41RiskManagement:ForaTDSequential9-13-9SellCount41CombiningTimeFramesforAdditionalConfidence43FrequentlyAskedQuestionsaboutTDSequential46RiskManagementforTDSequential49TDSequential:RecommendedSettings57TDAggressiveSequential58TDAggressiveSequential582TDCombo59TDComboBuySetup59RequirementsforaTDComboBuySetup60DifferencesinBuyCountdown:TDCombovs.TDSequential60TDComboBuyCountdown60RequirementsforaTDComboBuyCountdownVersionI(StrictVersion)60RequirementsforaTDComboBuyCountdownVersionII(Less-StrictVersion)61ToEnteraLongPosition62RiskManagement:ForEnteringaTDComboBuyCountdownLongPosition62RequirementsforaTDComboSellSetupVersionI62DifferencesinSellCountdown:TDCombovs.TDSequential63RequirementsforaTDComboSellCountdownVersionI(MoreStrict)64RequirementsforaTDComboSellCountdownVersionII(LessStrict)65RiskManagement:CalculatingtheRiskLevelofaShortPositionFollowingaTDComboSellCountdown65TDComboVersionI:RecommendedSettings6600_Perl_FM.indd98/6/089:48:09AM 3TDD-Wave69TheUnderlyingElliottWavePrinciple70ElliottWaveBasics71DeMark’sMechanizedVersionofElliottWave73TheTimeAspectoftheTDD-WaveRequirements74TDD-WaveRequirementsforWave174TDD-WaveRequirementsforWave274TDD-WaveRequirementsforWave374TDD-WaveRequirementsforWave475TDD-WaveRequirementsforWave575TDD-WaveRequirementsforWaveA75TDD-WaveRequirementsforWaveB76TDD-WaveRequirementsforWaveC76AdditionalQualifyingRulesfortheApplicationoftheTDD-WaveIndicatorsforanUptrend76AdditionalQualifiersfortheApplicationoftheTDD-WaveIndicatorsforaDowntrend77CalculatingTDD-WaveProjections78BullMarketPriceProjections78TheUltimateTargetsforTDD-Waves5andC80UpsideTargetforTDD-Wave580DownsideTargetforDownsideTDD-WaveC80BearMarketPriceProjections80UsingClosingPricesforPriceProjections82TDD-Wave2:Shallowvs.Deep82ToCalculatetheObjectiveforTDD-Wave582ToCalculateTDD-WaveC82ToDeterminetheEventualDownsideObjectiveforTDD-Wave583ToDeterminetheUpsideObjectiveforTDD-WaveC83TDD-WaveFrequentlyAskedQuestions83TheRelativeStrengthIndex83TDD-Wave:RecommendedSettings894TDLines91TheThreeTDDemandLineQualifiers94TDDemandLineQualifierConditionOne94TDDemandLineQualifierConditionTwo95TDDemandLineQualifierConditionThree96CalculatingtheObjectiveforaTDDemandLineBreak96ToDeterminetheObjectiveforaQualifiedDownsideViolation96ExitingaShortPositionUsingTDDemandLine9700_Perl_FM.indd108/6/089:48:10AM TDSupplyLineQualifiers97InitiationofaFreshLongPositionQualifierOne98InitiationofaFreshLongPositionQualifierTwo99InitiationofaFreshLongPositionQualifierThree100CalculatingtheObjectiveforaTDSupplyLineBreak100TDSupplyLineandExitingaLongPosition100TDLines:RecommendedSettings1015TDRetracements103DeterminingReferencesforProjectingTDRelativeRetracements103ThreeConditionsforValidatingaTDRelativeRetracementLevel:OnlyOneNeedsToBeSatisfiedforaQualifiedBreak106ConditionsThatInvalidateanUpsideBreakofaTDRelativeRetracementLevel107ConditionsThatQualifyaDownsideBreakofaTDRelativeRetracementLevel107ToExitaShortPositionAfteraQualifiedDownsideBreakofaTDRelativeRetracementLevel108TDRelativeRetracement:RecommendedSettings108MoreRetracementScenariosUpsideViolations109RetracementScenariosDownsideViolations109AnotherReversal/ConsolidationPattern109TDAbsoluteRetracement110RecommendedSettingsforTDAbsoluteRetracement110ConstructingtheTDRetracementArcforUpsideRetracements111ConstructingtheTDRetracementArcforDownsideRetracements1126TDTrendFactorandTDPropulsion115TDTrendFactor115ToDetermineaTopfromWhichtoCalculate116ToDetermineaBottomfromWhichtoCalculate118FrequentlyAskedQuestions120TDTrendFactor–RecommendedSettings121TDPropulsion121DefiningtheInitialThrustLevelforanAdvance122DefiningtheInitialThrustLevelforaDecline122TDPropulsion:RecommendedSettings1237TDOscillators125TDRangeExpansionIndex(TDREI)125InCaseYouNeedPromptingontheRSI...12500_Perl_FM.indd118/6/089:48:10AM TDREIFormula128ToEstablishaValuefortheTDREI129UsingtheTDREItoIdentifyProspectiveReversals129UsingtheTDPOQtoFilterTDREISignalsFurther130FortheMathematicians130TDREI:RecommendedSettings132TDDeMarkerIandTDDeMarkerII133TDDeMarkerI133OtherConditionsThatMustBeSatisfiedforaProspectiveBuy134OtherConditionsThatMustBeSatisfiedforaProspectiveSell135TDDeMarkerI:RecommendedSettings135TDDeMarkerII136TDDeMarkerII:RecommendedSettings137TDPressure137TheOBVIndicator137TDPressure:RecommendedSettings139TDRateofChange(TDROC)140ToDeterminetheTDROC140TDROC:RecommendedSettings140TDAlignment141TDAlignment141ToProducetheCompositeTDAlignmentIndicator142TDAlignment:RecommendedSettings1428TDMovingAverages145ToIdentifyaProspectiveBullishTrend146PlottingaBullishTDMovingAverageI146ToIdentifyaProspectiveBearishTrend146PlottingaBearishTDMovingAverageI147TDMovingAverageI:RecommendedSettings1499TDRangeProjection,TDRangeExpansionBreakout,andTDChannels153TDRangeProjection153TheThreePossibleScenariosandHowtoCalculateThem154TDRangeExpansionBreakout(TDREBO)157ToApplyTDREBOtoDailyPriceBarsandUsetheCurrentPriceBar’sOpenastheBase158TDChannels160TDChannelI161TDChannelII16200_Perl_FM.indd128/6/089:48:11AM 10Short-TermIndicators:TDDifferential,TDReverseDifferential,andTDAnti-Differential165TDDifferential165ConditionsNecessarytoProduceaTDDifferentialUpArrow165ConditionsNecessarytoProduceaTDDifferentialDownArrow166TDReverseDifferential167ConditionsNecessarytoProduceaTDReverseDifferentialDownArrow167ConditionsNecessarytoProduceaTDReverseDifferentialUpArrow169TDAnti-DifferentialUpArrow169ConditionsNecessarytoGenerateaTDAnti-DifferentialUpArrow170TDAnti-DifferentialDownArrow170ConditionsNecessarytoGenerateaTDAnti-DifferentialDownArrow17011TDWaldoPatterns171TDWaldoPatternTwo171TDWaldoPatternThree172TDWaldoPatternFourforaProspectiveBottom172TDWaldoPatternFourforaProspectiveTop173TDWaldoPatternFiveforaProspectiveTop173TDWaldoPatternFiveforaProspectiveBottom173TDWaldoPatternSixforaProspectiveBottom173TDWaldoPatternSixforaProspectiveTop174TDWaldoPatternSevenforaProspectiveShort-TermReversal174TDWaldoPatternEight17412PuttingItAllTogether175TheUBSFXRiskIndexComponents17913LearningtheDeMarkIndicators181UsingTDCursorCommentary182TDRS183Index18700_Perl_FM.indd138/6/089:48:11AM 00_Perl_FM.indd148/6/089:48:11AM ForewordIrememberasifitwereyesterday:ItwasthefirstseminarIhadgiveninLondoninsometime,andtheweatherwasunseasonablycoldforMarch.Theforecastwasforsleetandsnow,andIexpectedittohaveadampeningeffectonattendance.Ihadflownalmosttwelvehourstogetthere,butIdidn’tmindtheturnofevents:Ihadbeentoldtoexpectalargenumberofcashcurrencytradersatthesession,and,althoughIwasactivelyinvolvedinequities,commodities,andfinancialandcurrencyfutures,thecashcurrencymarketwasasegmentofthemarketIwasnotsowellacquaintedwith.Iarrivedattheseminar,then,expectingtobespeakingtoonlyahandfuloftraders,but,muchtomychagrin,notonlywastherealreadyalargeturnout,buttherewasalsoalargecontingentofcashcurrencytraders.Justpriortotheseminar,Ihadbeenintroducedtoapleasantyoungmanwhoactivelyfollowedthecashcurrencymarkets.Surprisingly,healsoappearedtobewellversedaboutmanyofmyindicators.Duringmypresentation,whentheaudienceposedcashcurrencyandindicatorquestions,hewaspreparedtoanswerthem.Hisoccasionalobservationsinteractedwellwithmypresentation,andsoIverymuchappreciatedhiscontributions.Thatexchangeservedasthegenesisofwhatwastobecomealong-termprofessionalandpersonalfriendshipthatendurestothisday.LittledidIknowonthedayoftheseminarthatJasonPerlhadonlyrecentlygraduatedfromaprestigiousEnglishuniversityandbegunacurrencyconsultingservice.Hisdeepknowledgeofthemarketsxv00_Perl_FM.indd158/6/089:48:12AM xviForewordandtheindicatorscertainlyimpressedme,aswellastheothersinattendance,andmadeitappearthathewassomeonewithmuchmoreexperience.NotonlydidheholdhisownwiththeseprofessionalsbutseemedtometobesoknowledgeablethatIfrequentlyreferredotherstohim.HewastheonlypersonIknewwhowasconversantinthecashcurrencymarketswhocouldapplymyindicatorstothemeffectively.Jasonneverletmedown.ThefeedbackIreceivedfromhisclientswasalwaysverypositive.Iknewheenjoyedconsulting,but,atthesametime,Irealizedthathewasdestinedforbiggerandbetterprofessionalchallenges.In2000,Jasonreportedthathehadacceptedapositionatalargeinvestmentbank.WhileIwashappyforhim,IwasconcernedthatalargecompanymighthaveabureaucraticstructurethatwouldstifleJason’sprofessionalcareerandgrowth.That,however,turnedoutnottobethecase.ItsoonbecameapparentthatanyapprehensionIhadhadwasillfounded.Jason’sskillstranscendedanycorporateboundariesthatmayhaveexisted.Hisknowledgeoftheindicatorsandtheirreal-timeapplicationexpandedbeyondsimplyforeigncurrenciesandextendedquicklytoothermarkets.ThisdeparturefromhisoriginaljobdescriptionwasaclearindicationthatbothhiscolleaguesatthecompanyandhiscorporateclientsvaluedJason’suniqueanalyticalabilities,andhewasmorethanwillingtoobligethem.Hisrapidascentupthecorporateladderisatestamenttohistremendousgraspoftheindicatorsandthemarketsandhistireless,dedicatedworkethic.WhatistrulycommendableisthatJason’sstrongappetiteforlearninghasalwaysbeenalignedwithhisdesiretoteachandadviseothers.WhatiswellknownisthetremendousrespecthisclientsandpeershaveforJasonasamarketstrategist,butwhatmaybeoverlookedistheadmirationthatthesesamepeoplehaveforJasonasaperson.Fartoooftenintheinvestmentindustryonetakesforgrantedthosewhomayhavecontributedtoone’ssuccess.Whetheritbeamentororafellowworkerwhodirectsonealongthepathtosuccessorteachestheintricaciesandmeaningfulaspectsofthebusiness,orthefamilywhomakessacrificesthatallowonetodevotethetimeandenergyrequiredtobesuccessful,oneoftenhasatendencytoforgetthepeoplewhomadecontributions.Jason,however,isunlikeothers:Hehasnotforgottenthosewhohavecontributedtohiscareer,andwhat’smoreimportantisthathehasgraciouslyandwillinglyreciprocatedbysharingthe00_Perl_FM.indd168/6/089:48:12AM Forewordxviiknowledgehehasacquiredwithothers.Notonlyclients,butalsototalstrangers,haveapproachedJason,andhehasspenttimewiththem,assistingthemwiththeirtrading.Manyyearsago,whentheDeMarkindicatorswerefirstintroducedontothevariousdata-servicenetworks(amongwhichwasBloomberg),theaudienceawarenessoftheindicators’constructionandapplicationwaslimited.Iwroteacoupleofbooksandarticlesatthetimethatincludedchartsshowinghowtheycouldbeused.Sincethen,Ihaveaddedsomefeaturestotheindicatorsandexpandedtheindicatoruniverse.Itwastimeforafreshperspectiveandupdatedcharts.Otherthanmyson,TJ,whowasworkingfulltimeforSteveCohenatSACCapital,themostlikelypersontotakeontheprojectwasJason.Whenwediscussedthepossibilityofanewbook,hewasreceptivetotheidea,andIwasconfidenthisexperienceandactiveapplicationofthestudiestovariousmarketswouldprovideanexcellentfoundationforanewbook.Overtheyears,Jasonhasbeenapassionatemissionaryfortheindicators,highlightingtheirvaluetocentralbanks,largeinstitutionalandhedgefundsandtootherprofessionalswithinhislarge,worldwidecompanynetwork.Hisknowledgeofthemarketmodelsisvast,heiscurrentwiththelatestindicatorupgrades,andheissensitivetothequestionsusersofdifferentskilllevelsmighthaveregardingtheindicators’constructionandapplication.Whatismostimportantisthathehasprofitablyappliedtheindicators,andhisadvisory-servicetradingrecordhasbeenexceptional.Itmadesensetome,andIwascertainitwouldtoreadersaswell:Jasonwastherightpersonattherighttimetobetheauthorofabookdevotedtotheindicators.Thequestionnowwaswhowouldbetheidealpublisher.TherewasnoquestioninourmindsthatitwouldhavetobeBloomberg.Bloomberghasprogrammedtheindicatorsandhasalargestaffdedicatedtoensuringthattheindicatorsareupdatedandworkingproperly.Theapplicationspecialistsarewellversedintheindicatorsandwellequippedtoansweranyquestionsclientsmighthave.Itwasaperfectfit.IampleasedtohaveJasonasauthorofabookthatrepresentsmycareer’sresearchefforts.Hiscommandoftheindicatorsisunparalleled,asishisabilitytopresentthesubjectmattersuccinctlyandclearly.Hisself-effacingnatureconcealshismanyskills.WhatisremarkableaboutJasonisthat,afterallthesuccessandfamehehasachieved,00_Perl_FM.indd178/6/089:48:13AM xviiiForewordheisstillthesamepersonImetmanyyearsagoonthatcoldwintryday.Thankyou,andcongratulations,Jason,forajobwelldone.Atyouryoungage,youhaveaccomplishedmuch,andIamcertainmoremajormilestoneswillfollow.TomDeMark00_Perl_FM.indd188/6/089:48:13AM AcknowledgmentsIamgratefultomywife,Jennifer,forherlove,patience,tolerance,support,andunderstandingatalltimesandinparticularwhileIwaswritingthisbook.Tomyparentsfortheirlove,guidance,andsupportovertheyearsandforinstillinginmeasenseofwhat’srightandfornevergivinguponme,evenwhentheydiscoveredIdidn’twanttobealawyeroranaccountant;ToTomDeMark,myfriendandmentor,whoseongoingcommit-mentandenthusiasmfordecodingmarketsisinfectious;ToallthepeopleatUBS:themanagementofUBSFICC,ourFXsalespeople,theTechnicalandFundamentalStrategygroups,theWebeditors,andtheWebdevelopmentteams;ToPiersFallowfield-Cooper,forbelievinginmeandforgivingmeachanceatthestartofmycareer;ToIanandHonorRobertson,forencouragingcontinuousself-improvementandforfacilitatingmyfirstmeetingwithTomDeMark;TothemanagementandstaffofBloomberg,CQG,andeSignal,forbeingsoresponsiveovertheyearstomyrequirementsasademandingcustomer;ToPhilipAlgar,TasoAnastasiou,RickBensignor,RoderickBentley,PeterBorish,JohnBurbankIII,AntonioCarbone,GeraldChan,JimChorek,KevanConlon,LeonCooperman,DarrenCoote,HerbertCoyne,TomDeMarkJr.,SteveEinhorn,CherylGalante,LaurieGoodman,LaeethIsharc,AndrewJoncus,DaveKeller,RickKnox,xix00_Perl_FM.indd198/6/089:48:13AM xxAcknowledgmentsDavidKyte,JamesLoh,Ger-GheeLow,MartinMasterson,TimMcCullough,MansoorMohi-uddin,ToddMorakis,DavidMunro,HerwigPrielipp,GuidoRiolo,JosephSchroeter,GuyScott,FabianShey,JoeSigelman,EdSolari,EugeneSorenson,RetoStadelman,MarkSteinert,StevenStewart,MattStorz,GlenSulam,AnthonyTan,GreggTan,DougTengler,DavidToth,RonWilliam,LarryWilliams,DavidWood,StanYabroff,andtoallthenumerousclientsofUBSfortheirinterestinandsupportofmyworkovertheyears.Andfinally,manythankstomyeditors;RonnieMcDavidforherpatienceandtoleranceandfornotsuggestingIlookupthemeaningofthewords“andfinally,”andtoDavidGeorge,forinstillinginmethatapictureisonlyworthathousandwordswhenit’scorrectlyannotated.00_Perl_FM.indd208/6/089:48:14AM IntroductionIntheearly1990s,whilestudyingeconomics,IwasworkingasasummerinternattheBankofEngland,intheirGilt-EdgedandMoneyMarketsDivision.Oneday,inSeptemberof1990,justbeforethereleaseoftheU.K.’sAugustinflationnumber,acolleagueandIhappenedtobeworkinginaroomwithnoaccesstooutsidecommunication.MycolleagueaskedmetospeculateonwhatIthoughttheinflationnumberwouldbe,andIgavehimmybesteducatedguess.“Ithinkyouwillbesurprisedtofindthatitwillactuallybemuchhigher,”mycolleaguetoldme.“Onthatbasis,”heasked,“howdoyouthinkthemarketwillreact?”SummoningallthetheoreticalknowledgeIcouldmuster,Ioutlinedatextbookcase,givingtheexpectedimplicationsforthepoundsterlingandforgilts.Asitturnedout,althoughmycolleaguewasrightabouttheinflationnumber,Iwascompletelywrongaboutthemarket’sreaction.Perceptioncanoftenbeverydifferentfromreality;thiswasnotonlyanepiphanyformeonpositioning,butalsoaneventthatshookmyconfidence.IfIcan’tevengetitrightwhenIhavetheinformationatmydisposalinadvance,Ithought,whathopewillIhavewhenIhavenoadvanceknowledgeandamlefttofendformyself?Fastforwardtwoyears:Ihadjustgraduatedfromuniversity,theU.K.wasinarecession,andIwasoneofthousandsofunemployedfinancemajorsstrugglingtofindajob.IfIwasreallyintentonworkinginthefinancialmarkets,someonesuggested,thebestthingImightxxi00_Perl_FM.indd218/6/089:48:14AM xxiiIntroductiondowouldbetolearntechnicalanalysis—thestudyofhistoricalpricechartsandmarkettiming.Technicalanalysiswasanew,butpromising,strategyinEuropeatthattime,butitmightbeanareawhereIcouldcreateanicheformyself.Thatturnedouttobegoodadvice.Then,beingsomethingofacontrarianbynature,Iwasdrawntoacontrarianapproach,and,inmyresearch,onenameIwascomingacrossagainandagainwasthatofTomDeMark.HehadjustwrittenTheNewScienceofTechnicalAnalysis,andheimpressedmeasbeingaparticularlyoriginalthinker.OnedaymyfriendIanRobertson,knowingIhadbeenstudyingDeMark’sworkforawhile,askedifI’dbeinterestedinattendingaseminarDeMarkwasgivinginLondon.Ijumpedatthechance,but,whenIwenttotheseminar,Iwasmorethanalittlehumbledtodiscoverthat,afterme,themostjuniorpersonintheaudienceoftwentywastheglobalheadoffixedincomeatalargeAmericaninvestmentbank.Afterthesession,ImanagedtochatbrieflywithTom,andheevenpromisedtocallmewhenhegotbacktotheUnitedStates.SincetheUnitedStateswasalongwayaway,however,andIhadonlyscrawledmyphonenumberonthebackofaborrowedbusinesscard,itseemedhighlyunlikelythatIwouldeverhearfromhimagain.Therefore,oneSundaymorningsomeweekslater(at4:30a.m.Londontime,tobeprecise),Iwasnotexpectingthephonecallthatwokemefromasoundsleep.“ThisisTomDeMark,”saidthevoiceonthephone.“Wespokeafewmonthsago.Youhadsomequestionsaboutmyindicators?”(Forsomeonewithsuchagoodsenseofmarkettiming,Tomhadasurprisinglybadsenseoftimezonedifferences.)Inmyfoggystate,Iabruptlyaskedhimtocallbacklater—butdidn’tthinkofaskingforacall-backnumber.Notasmartresponsefromayoungmanwhowasunemployed.TomygoodfortuneandtoTom’scredit,however,hedidringbacklaterthatmorning,andafterthatcallweeventuallybegantohaveregulardiscussionsonthemarkets.Oneparticularday,aboutayearlater,whenwewerespeaking,Tomcomplimentedmeonaparticularlygoodcurrencycall:“Welldone,”hesaid.“Youmusthavemadeafortunetoday.”“Well,notexactly,”Ireplied,andconfessedthatIwasstillworkingfrommybedroomatmyparents’house,usingachartingsystem00_Perl_FM.indd228/6/089:48:14AM IntroductionxxiiiIhadbarteredfortheuseof,inexchangeforsomeconsultingworkIhaddone,andIhadnothadalotridingonmyclevercurrencycall.Therewassilence,asTomdigestedtheinformationthathehadbeenwastingagooddealofhistimeduringthepastyearintalkingtoanunemployedstudent.“Well,”heresponded,morekindlythanIexpected,“whydon’tyougoandworkforahedgefund?”andproceededtogivemethenamesoftenmajortraderswho,atonetimeoranother,hadofferedhimmoney-managementoremploymentopportunitiesandwho(ifImentionedhisname)mightjustbehotcontactsforme.Onamoresobernote,headded,“Youmightbeadecentanalyst,butbeingeffectiveonthejobalsomeansbeingabletosellyourself.Thiswillbeagoodtest.”Therest,astheysay,ishistory,andI’venotlookedbacksince.IknowthatthosepeoplewhoarenewtoTom’sworkoftenquestionhismotivesforsharinghisideas,butI’vealwaysbeengratefultohimforkickstartingmycareerwhenIhadnothingmoretoofferthanakeeninterestinmarketsandyouthfulenthusiasmforhisindicators.Hehasselflesslyintroducedmetomanyofthemarketgreats,andnever,inallthefourteenyearsI’veknownhim,hasheeveraskedforanythinginreturn.Tom’sindicatorshaveenabledmetomakesomeverygoodmarketcalls.Whileit’stoughemployingacontrarianmethodology,Ihopethosewhohavefollowedmycallsovertheyearshavecometorealizethatitisnotentirelybychancethattherehavebeenmoregoodcallsthanbadones.ThisbookhasbeenwrittenbecauseclientsaroundtheworldhaveaskedmetoprovidethemwithadetailedexplanationoftheDeMarkindicators.TherearesomewhomightquestionwhetherthevalidityofTom’sworkwilldiminishovertime,asmorepeoplebecomefamiliarwithit.Inresponse,I’durgethosepeopletothinkaboutdieting.Sincethesolutionissimple—eatlessandexercisemore—whyisthedietbusinessamultibillion-dollarindustry?Theansweristhatpeopledon’tliketoacknowledgethatthesolutionisasimpleone,thatitcomesdowntodiscipline.Thetruth—thatevenifyouhaveadietplan,itwon’tbeeffectiveunlessyoustickwiththeprogram—isthesamefortheDeMarkindicators.DisciplinewiththeDeMarkindicatorsisperhapsevenmoredifficultthandieting,because,whenthetrendisgoingagainstyou,there’salways00_Perl_FM.indd238/6/089:48:15AM xxivIntroductionatemptationtoabandontheindicators.Aswithdieting,applyingtheindicatorsisastrategythathasitsupsanddowns,but,asIthinkyou’llseefromthefollowingchapters,usingtheindicatorsprovidesanedgeintermsofacuterisk/rewardtradingopportunitiesandmarkettiming.Ifyouhavethepatienceanddisciplinetoperseverewiththem,theindicatorswillproducepositiveresultsovertime.IwillwalkyouthroughthesignatureDeMarkcountertrendstudieslikeTDSequentialTMandTDComboTM,butI’llalsodiscussmanyofTom’sotherindicatorsthatofferanobjectivespinonmoreconventionaltechniques,suchasmovingaverages,momentumoscillators,trendlines,retracements,andElliottwave.(Anindexofalltheindicators,listingthepageswheretheyaredescribed,canbefoundatthebackofthebook.)SomehavequestionedwhetherthewidespreadacceptanceoftheDeMarkindicatorsmightdiminishtheireffectiveness.Forthosepeople,Ireturntothefoodmetaphor.Lookatworld-renownedchefGordonRamsay:Hemighthavesoldalotofcookbooks,buthisbooksaleshaveprovednothreattohisrestaurants.Still,thereal-timeapplicationofTom’sindicatorsisbynomeanseasy.Therearenoget-rich-quickshortcuts.Youmustworkhardandbedisciplined,objective,anddispassionateaboutthesignalstheygenerate.Youmustadhererigidlytostrictmoney-managementrules.Iammerelysupplyingyouwithsomegoodtried-and-testedrecipes;it’suptoyoutodothecooking.00_Perl_FM.indd248/6/089:48:15AM Author’sNoteTheDeMarkindicatorsareavailableonAspenGraphics,Bloomberg,CQG,ThomsonFinancial,andTradeStation.Forcashforeignexchangemarkets,10:00p.m.localLondontimehasbeenusedastheclosefortheglobaltradingday.Forsimplicity,mostofthechartsinthisbookaredailypricecharts,butsincethesestudiesarebasedonrelativepriceaction,theycanallbeappliedtoanymarketortimeframe.Also,unlessnotedotherwise,allchartshavebeentakenfromtheBloombergProfessionalservice.xxv00_Perl_FM.indd258/6/089:48:16AM 00_Perl_FM.indd268/6/089:48:16AM AboutDeMarkIndicatorTrademarksAllDeMarkindicatorslistedhereareregisteredtrademarksandareprotectedbyU.S.trademarklaw.AnyunauthorizedusewithouttheexpresswrittenpermissionofMarketStudiesorThomasDeMarkisaviolationofthelaw.Theindicatorsareasfollows:TDSetupTM,TDSetupTrendTM(TDSTTM),TDCountdownTM,TDSequentialTM,TDComboTM,TDAggressiveSequentialTM,TDAggressiveComboTM,TDCamouflageTM,TDClopTM,TDClopwinTM,TDOpenTM,TDTrapTM,TDTerminationCountTM,TDReferenceCloseTM,TDD-WaveTM,TDDemandLineTM,TDSupplyLineTM,TDRelativeRetracementTM,TDAbsoluteRetracementTM,TDRetracementArcTM,TDTrendFactorTM,TDPropulsionTM,TDRangeExpansionIndexTM(TDREITM),TDPriceOscillatorQualifierTM(TDPOQTM),TDDeMarker1TM,TDDeMarker2TM,TDPressureTM,TDRateofChangeTM(TDROCTM),TDAlignmentTM,TDMovingAverage1TM,TDMovingAverage2TM,TDRangeProjectionTM,TDRangeExpansionBreakoutTM(TDREBOTM),TDChannelOneTM,TDChannelTwoTM,TDDifferentialTM,TDReverseDifferentialTM,TDAnti-DifferentialTM,andTDWaldoPatternsTM.xxvii00_Perl_FM.indd278/6/089:48:16AM 00_Perl_FM.indd288/6/089:48:17AM chapter1TDSequentialDefiningtheTrendandIdentifyingExhaustionPointsWhenistartedlookingattheDeMarkindicatorsintheearly1990s,itwasTDSequentialthatfirstpiquedmyinterest.Ihadpreviouslycomeacrossothertechnicalstudiesthatidentifiedtradingopportunitieswellwhenpricesweretrending,andstillotherindicatorsthatwereparticularlysuitedtoranges,butIhadfounditfrustratingthatnoneoftheseapproacheswassufficientlydynamictodistinguishbetweenthesetwoverydifferenttypesofpriceaction.TDSequentialappealstomebecauseitaddressesthatproblem,havingbothmomentum(TDSetup)andtrending(TDCountdown)components.Furthermore,it’scompletelyobjectiveandincorporatesdisciplinedmoney-managementrules,and(becauseit’sbasedonrelativepriceaction)youcanapplyittoanymarketortimeframe,regardlessofthemarket’sunderlyingvolatility,withouthavingtochangeanyofthedefaultindicatorsettings.Forthoseofusbroughtupinthecomputerage,itmayseemhardtobelieve,butTomDeMarkdevelopedTDSequentialbyhand,throughaprocessoftrialanderror,inthe1970s.Itneverceasestoamazemehowsomethingoriginallycreatedtoanalyzedailypricedatacanbeappliedsoeffectively,morethanthirtyyearslater,toanytimeframe—fromoneminutetooneyear—andtoanymarket.Sincethemajorityofpeoplearetrendfollowers,it’shardlysurprisingthat“thetrendisyourfriend”isoneofthemostwidelyquotedtradingmantras.Whileitmayseemcounterintuitive,giventhatmostpeopledofollowtrends,TDSequentialattemptstoisolateprospectiveexhaustion101_Perl_ch01.indd18/08/57:24:15PM DeMarkIndicatorspointsinranges,toanticipatemarkettopsandbottomswhenitbelievespricesareoverboughtoroversoldandduringtrendswhensentimentisinvariablyatanextreme.Evenifyouarenotinclinedtothetechnical,TDSequentialcanbehelpfulformarket-timingpurposes,asanadjuncttoyourexistingarsenaloftradingtools.Tradersorientedtofundamentalstellmeithelpsthemdeterminetake-profitlevelswhentheywouldotherwisebereliantonaless-efficientprice-reversalpatterntocloseoutaprofitableposition.TDSequentialalsohighlights,atthetimethesignalisgenerated,pointswhereoneshouldrefrainfromestablishingoraddingtoanexistingpositioninthedirectionoftheunderlyingtrend.Onceyou’recomfortablewiththemethodology,however,youcanuseTDSequentialasIdo,tofadetrends.Let’slookatthecomponentsofTDSequentialinordertounderstandhowandwhyitmanagestobesoversatile.Theindicatorhastwocomponents:TDSetup,whichreliesonmomentumtodefinepriceranges,andTDCountdown,whichistrendbased,andlooksforlow-riskopportunitiestofadeestablisheddirectionalmoves.AsTDSequentialisprobablythemost-talked-aboutTDindicator,I’llexplainitindetailforbothbullishandbearishscenarios,aswellasanswersomefrequentlyaskedquestions.tDSetupTDSetupisonecomponentofTDSequential;theothercomponent,TDCountdown,cannotcomeintoplayuntilaTDSetupformationiscomplete.TDSetup,however,isnotonlyaprerequisiteforthebroadertrend-reversalTDCountdownsignal;itisalsoanindicator,onethatcanhelpdeterminewhetheramarketislikelytobeconfinedtoatradingrangeorstartingadirectionaltrend.TDSetup,ofcourse,hasbothbuyandsellindicators,andIwilladdressthemseparately.TheprerequisiteforaTDBuySetupisaBearishTDPriceFlip,whichindicatesaswitchfrompositivetonegativemomentum(Figure1.1).■BearishTDPriceFlipABearishTDPriceFlipoccurswhenthemarketrecordsaclosegreaterthantheclosefourbarsearlier,immediatelyfollowedbyacloselessthantheclosefourbarsearlier.01_Perl_ch01.indd28/08/57:24:16PM TDSequenTial1.0200X’61.01005Y112XY’23341.0000450.9900670.98008912/71011121312/141718192012/21242526272812/31123472007Figure1.1BearishTDPriceFliptoInitiateaTDBuySetupThechartofuSDCADillustratesthepriceactionnecessarytoproduceabearishTDPriceFlipfortheinitiationofaTDBuySetup,thatis,aclosegreaterthantheclosefourpricebarsearlier,immediatelyfollowedbyacloselessthantheclosefourbarsearlier.inthisinstance,thecloseofX’isabovethecloseofX,andX’isfollowedbyY’,whichisbelowY.Thechartalsoshowstheextensionofthatpriceactionintoanuninterruptedseriesofnineconsecutivecloses,eachonelessthanthecorrespondingclosefourpricebarsearlier.Note:ThebaronwhichthebearishTDPriceFlipoccursqualifiesasbaroneoftheprospectiveTDBuySetup.■TDBuySetupAfterabearishTDPriceFlip,theremustbenineconsecutivecloses,eachonelessthanthecorrespondingclosefourbarsearlier.Sincetheindicatorwasoriginallydesignedtolookatdailypricedata,acomparisonoftheclosingpricewiththeclosingpricefourbarsearlierrepresentsarollingweek.01_Perl_ch01.indd38/08/57:24:20PM DeMarkIndicatorsInterruptionofatDBuySetupIf,atanypoint,thesequence—ofnineconsecutiveclosingpriceslessthantheclosingpricefourbarsearlier(uptoandincludingthecloseofTDBuySetupbarnine)—isinterrupted,thedevelopingTDBuySetupwillbecanceledandmustbeginanew.Havingtostartalloveragaincantestone’spatience,becauseitpostponestheappearanceofasignal.Butthedelayismeaningful,becauseitsuggestsachangeinmarketdynamics,whichtheindicatoracknowledgesbychangingitsbehavior.completionoftheFirstphaseoftDSequentialOnceaTDBuySetupsuccessfullyreachesnine,thefirstphaseofTDSequentialiscomplete,andaTDBuyCountdowncanbegin.tDSellSetupForaprospectivesellsituation,beforeaTDSellCountdowncanbegin,weneedtoseeabullishTDPriceFlip—aswitchfromnegativetopositivemomentum(Figure1.2)—inordertoinitiateaTDSellSetup.■BullishTDPriceFlipABullishTDPriceFlipoccurswhenthemarketrecordsacloselessthantheclosefourbarsbefore,immediatelyfollowedbyaclosegreaterthantheclosefourbarsearlier.OncethebullishTDPriceFlipoccurs,aTDSellSetupcanbegin.■TDSellSetupOncethebullishTDPriceFlipoccurs,aTDSellSetup,consistingofnineconsecutivecloses,eachonegreaterthanthecorrespondingclosefourbarsearlier,canbegin.■InterruptionofaTDSellSetupIfAtanypoint,thesequenceofnineconsecutiveclosesgreaterthantheclosefourbarsearlierisinterrupted—uptoandincludingthecloseofTDBuySetupbarnine—01_Perl_ch01.indd48/08/57:24:21PM TDSequenTial110.0078108.0069534X’Y’2Y1106.00X104.00102.001100.00298.00457/6910111216171819232425262730123678/89107/137/207/31Figure1.2BullishTDPriceFliptoInitiateaTDSellSetupThechartofAuDJPYillustratesthepriceactionnecessarytoproduceabullishTDPriceFlipfortheinitiationofaTDSellSetup,thatis,acloselessthantheclosefourpricebarsearlier,immediatelyfollowedbyaclosegreaterthantheclosefourbarsearlier.inthisinstance,thecloseofX’isbelowthecloseofX,andX’isfollowedbyY’,whichisaboveY.Thechartalsoshowstheextensionofthatpriceactionintoanuninterruptedseriesofnineconsecutivecloses,eachonegreaterthanthecorrespondingclosefourpricebarsearlier.Note:ThebaronwhichtheTDPriceFlipoccursqualifiesasbaroneoftheprospectiveTDBuySetup.ThenThedevelopingTDBuySetupwillbecanceledandmustbeginanew.AfteraTDSellSetupsuccessfullyreachesnine,thefirstphaseofTDSequentialiscomplete,andaTDSellCountdowncanbegin.UsingtDStLevelstoDeterminetheUnderlyingtrendBiasManypeoplemovestraightfromTDSetuptoTDCountdown,overlookingtheimplicationsofacompletedTDSetup.But,indoingso,theymissthevaluabledirectionalinsightprovidedbythisaspectofTDSequential.01_Perl_ch01.indd58/08/57:24:24PM DeMarkIndicatorsSinceitcomparesthecurrentclosewiththecorrespondingclosefourbarsearlier,TDSetuphasamomentumcomponent,but,unlikemoreconventionalmomentumindicators,TDSetupisdynamic.ThisisanimportantdistinctionthatenablesTDSetuptodifferentiatebetweentrendingandnontrendingpriceaction.EachtimethemarketcompletesaTDSetup,thetruepriceextremeofthatmove—knownastheTDSetupTrend(TDST)—redefinestherangeintermsofpricelevels.FromaTDperspective,theensuingpriceresponsetothatTDSetupTrendlevelhelpstodeterminetheunderlyingdirectionalbias.tDSequentialvs.MoreconventionalMomentumIndicatorsConventionalmomentumindicators,suchastheRSI(RelativeStrengthIndex),aretypicallycalibratedbetweenzeroandonehundred,andhavetheconstraintoffixedoverboughtandoversoldzones,whichmakesthemlessreliablewhenpriceactionswitchesbetweenrangesandtrends.Inastronglydirectionalupmove,theRSIrarelypullsbackintoextremeoversoldterritory(whichistypicallysetaroundtwentyfive),but,instead,findssupportbetweenanoscillatorreadingoffiftyandforty.Similarly,inastronglydirectionaldownmove,theRSItendsnottoretraceintoextremeoverboughtterritory(typicallysetaroundseventy-five).Instead,theRSIusuallyfindsresistanceintheoscillatorzonebetweenfiftyandsixty.TheTDSetupindicator,ontheotherhand,adjustsdynamically,inlinewiththepriceaction,sinceitrecalculateswhatitconsiderstoberangeextremesintheformofTDSTLevelseverytimeanewTDSetupcompletes.SeeFigures1.3and1.4.■TDSetupScenarioI:Consolidation/ReversalIfApricefailstorecordaclosebeyondtheabsolutehighorlowofthemostrecentlycompletedTDSetupintheoppositedirection—thatis,theTDSTLevel—uptoandincludingthecompletionofbarnineofthecurrentactiveTDSetup,01_Perl_ch01.indd68/08/57:24:25PM 120119TDSTresistance11889117671521164MarketcompletedaTDBuy123SetupaheadofTDSTsupport,3115indicatingthemovelower564114wasmostlikelycorrective.789TDSTsupport113AlthoughdownsidemomentumintheRSIwas80tailingoff,itdidn’tprovideadefinitivebuysignal.604020891314161920232627282934561011121317181920212627282311/1511/2111/3012/712/1412/2412/312007Figure1.3Scenario1:Consolidation/Reversalinthechartoftheu.S.30-yearbond(uSH8),althoughtherSineverentersoversoldterritory,thereisaclearsignaltoenterlongsuponcompletionoftheTDBuySetup—thatis,thecloseofTDBuySetupbarnine—becausenoneofthebarswithintheTDBuySetupphasehassufficientmomentumtoclosebelowTDSTsupport.NotehowatthetimeoftheTDSTresistanceviolation,momentumintheformoftheRSIwasalreadyapproachingoverboughtterritoryeventhoughthe9101113912uptrendwasjuststartingtoaccelerate.8782.0600667MarketclosesaboveTDSTresistancebeforecompletinga523452.0400TDSellSetup,indicatinganincreasedprobabilitythatthe1uptrendcontinuestowardsaTDCountdown13.342.0200121TDSTresistance6789452.00003211.98001234567981.960080604020May15May22May31Jun8Jun15Jun22Jun29Jul9Jul16Jul23Jul31Figure1.4Scenario2:TrendExtensioninthechartofgBPuSD,whenthemarketclosesaboveTDSTresistance,itsuggeststhereisaheightenedriskthatthedevelopingbulltrendwillremainintactandpriceactionwillmostlikelycontinuetoextendhigher.Note:AtthetimeoftheTDSTbreak,theRSIisalreadyapproachingoverboughtterritory,eventhoughtheuptrendisonlybeginningtoaccelerate.701_Perl_ch01.indd78/08/57:24:31PM DeMarkIndicatorsThenThemarketisdeemedtohaveinsufficientmomentumtobreakoutoftherange.Pricesshouldthenexperienceashort-termreversaloftheunderlyingtrend,oratleastaconsolidation,lastingaminimumofonetofourpricebars.ItisnotsignificantiftheTDSTLevelisviolatedonanintrabarbasis;whatisrelevantisonlywhetherornotthemarketisabletosus-tainaTDSTbreakonaclosingbasis(Figures1.5and1.6).■TDSetupScenarioII:ConfirmedTrendExtensionIfPriceexceedstheextremeabsolutehighorlowofapreviousTDSetupintheoppositedirectiononaclosingbasis,120119118891171672116541151233MarketcompletesaTDBuy564Setup,withouthavingfirst7114closedbeneathTDSTsupport.89TDSTsupport113Nov15Nov21Nov30Dec7Dec14Dec24Dec31Jan82007Figure1.5TDBuySetupUnabletoCloseBelowTDSTSupportThechartoftheMarchu.S.30-yearbond(uSH8)showsaTDBuySetupunabletoclosebelowTDSTsupport,indicatingthatbuyingpressureremainsthedominantforce,withthemarketthereforelikelytorecovernearterm,sinceithasinsufficientdownwardmomentumtostageabreakoutoftherangetothedownside.01_Perl_ch01.indd88/08/57:24:35PM TDSequenTial9TDSTresistance26.00MarketcompletesaTDSell89Setup,withouthavingfirst725.50closedaboveTDSTresistance.6152425.00234523311694624.5058127101324.0011834925623.5017723.00Jun29Jul9Jul16Jul23Jul31Aug8Aug15Aug23Aug31Sep7Sep14Sep21Sep28Oct8Oct15Figure1.6TDSellSetupUnabletoCloseAboveTDSTResistanceThechartofPfizershowsaTDSellSetupunabletocloseaboveTDSTresistance,indicatingthatsellingpressureremainsthedominantforce,withthemarketthereforevulnerabletoashort-termcorrection,sinceithasinsufficientupwardmomentumtobreakoutoftherangetotheupside.ThenThemarketisdeemedtohavesufficientmomentumtofacilitateasustainedbreakoutoftherange.Pricesshouldthencontinueinthedirectionoftheunderlyingtrend,andquitepossiblymovetowardacompletedTDCountdownbeforeareversaloccurs.Frompersonalexperience,Ifindthat,ifaTDSTlevelbreaksuptoandincludingbarthreeofaprospectiveTDSetup,thereisagoodchancethatthemarketwillcontinueinthedirectionofthebreak,atleastuntilthecompletionofthedevelopingTDSetup(Figures1.,1.,1.7,and1.8).tDBuySetup“perfection”TDBuySetup“perfection”istheprerequisiteforenteringalongpositionbasedonacompletedTDBuySetup.01_Perl_ch01.indd98/08/57:24:37PM 92.000712345611789101262345891390.00011TDSTsupport288.0003645MarketclosesbeneathTDSTsupportbefore78completingaTDBuySetup,indicatingan9671234589increasedprobabilitythatthedowntrend86.0003continuestowardsaTDCountdown13.45126789101384.000111282.000Jan31Feb14Feb28Mar15Mar31Apr17Apr28May15May31Jun15Figure1.7MarketCloseBelowTDSTSupportPriortotheCompletionofaTDBuySetupinthechartoftheuSDindex(DXY),themarketclosesbelowTDSTsupportpriortothecompletionofaTDBuySetup,indicatingthatsellingpressurehasintensified,withthemarkethavingsufficientbearishmomentumtosustainabreaktothedownside.11139109122.06007886MarketclosesaboveTDSTresistancebefore675completingaTDSellSetup,indicatingan2342.04005increasedprobabilitythattheuptrend1continuestowardsaTDCountdown13.432.02001218TDSTresistance6792.0000453211.98001234567981.9600May7May15May22May31Jun8Jun15Jun22Jun29Jul9Jul16Jul23Jul31Figure1.8MarketCloseAboveTDSTResistanceAfterInitialRebuffinthechartofgBPuSD,themarket,havinginitiallybeenrebuffedbyTDSTresistance,subsequentlyclosesaboveresistancepriortothecompletionofaTDSellSetup,indicatingthatbuyingpressurehasintensifiedandthemarkethassufficientbullishmomentumtosustainabreaktotheupside.1001_Perl_ch01.indd108/08/57:24:43PM TDSequenTial11■TDBuySetup“Perfection”ThelowofbarseightornineoftheTDBuySetuporasubsequentlowmustbelessthan,orequalto,thelowsofbarssixandsevenoftheTDBuySetup.TDSetupperfectionisdeferreduntilthathappens,and,aslongasthatsituationremains,theriskexistsforaretestofthepricelowofTDBuySetupbarssixorseven,priortotheminimallyexpectedresponseofaone-tofour-barconsolidation/reversal.BeforethetraderentersalongpositionbasedonacompletedTDBuySetup,TDBuySetupperfectionisneededtoincreasetheprobabilityofhisenteringthemarketatornearaninterimpricelow.Note:PerfectedTDSetups(Figure1.9)canbeseenbycheckingtheTDSetupperfectionarrowsundertheTDSequentialSetup“properties”ontheBloombergterminaltoolbar.119TDSTresistance118MarketcompletedaperfectedTDBuySetup(asindicatedbytheuparrow),sincethelowofbarTDBuySetup8or9wasbeneaththelowofTDBuySetupbars6and7.1171211611535647114TDSTsupport8911345612/71011121312/141718192012/212426272812/312342007Figure1.9PerfectedTDBuySetupinthechartoftheu.S.30-yearbond(uSH8),themarketrecordsaperfectedTDBuySetupbarnine,sincethelowsofTDSetupbarseightorninearelessthanthelowsofTDSetupbarssixandseven.01_Perl_ch01.indd118/08/57:24:46PM 1DeMarkIndicators84.0081382.00712119109680.00131012117178.008627611598345476.00MarketcompletedaTDBuySetup,butitwas35910notperfectedbecausethelowsofbars8or97862weren’tbelowthelowsofbars6and7.TheTD374.001BuySetupwasperfectedfivedayslaterwhen456Theuparrowindicatesthebarthemarkettradedbelowthelowofbar7.wheretheTDBuySetupwas82perfected,inthisinstance,when72.0079TDSTsupport1themarkettradedbelowthelowofTDBuySetupbar7.70.00Dec15Dec29Jan15Jan31Feb14Feb28Mar15Mar30Apr16Apr30May152006Figure1.10UnperfectedTDBuySetupinthechartofHutchisonWhampoa,themarketreachesTDBuySetupbarnine,buttheTDBuySetupisnotperfectedbecausethelowsofTDBuySetupbarseightorninearenotlessthanthelowsofTDBuySetupbarssixandseven.Thispatternshowsanincreasedriskthatthemarketcouldcomebacktoretestthelesserofbarssixandsevenbeforetheexpectedconsolidation/reversalmaterializes.Theconsolidation/reversaldoescome,fivedayslater,andtheuparrowbelowthebarindicateswheretheTDBuySetupiseventuallyperfected.TheabsenceofTDBuySetupperfection(Figure1.10)doesn’tretardtheonsetofaTDBuyCountdown,butitisanimportantconsiderationforthosewhowanttotradeTDBuySetups.tradingatDBuySetupOtherthansayingthatonecaninitiateapositionifaTDBuySetupholdsTDSTsupportonaclosingbasis,DeMarkdoesn’tgointodetailabouthowatradercanactuallydefinetheparametersforsuchasignal.HereishowIthinkTDBuySetups(Figure1.11)canbetradedobjectively,usingaveryclearsetofrules:01_Perl_ch01.indd128/08/57:24:48PM TDSequenTial1119MarketcompletedaperfectedTDBuySetupaheadofTDSTsupport.GiventheproximityofTDSTsupport,onewouldbuyonthecloseofTDBuySetupbar9.Inthisinstance,sincebar8wasthelowestlowinthe118Setup,onewouldtakethetruerangeofbar8andsubtractthatfromthelowofbar8todetermineastop-lossonthelongposition.117121161153564711489TDSTsupport11345612/71011121312/141718192012/212426272812/312342007Figure1.11TradingaPerfectedTDBuySetupinthechartoftheu.S.30-yearbond(uSH8),themarketrecordsaperfectedTDBuySetupaheadofTDSTsupport.■Perl’sRulesforTradingTDBuySetupsObjectivelyManypeoplebelieve,mistakenly,thatoneshouldinitiatealongpositionfollowingeverycompletedTDBuySetup.iadviseagainstdoingthatexceptunderthefollowingconditions:1.WhentheTDBuySetuphasbeenperfected,thatis,thelowofTDBuySetupbareightornineislessthanthelowsofTDBuySetupbarssixandseven,2.WhennoneofthebarswithintheTDBuySetuphasclosedbelowTDSTsupport,and3.WhenthecloseofTDBuySetupbarnineisincloseproximitytoTDSTsupport.IalsopreferthecloseofTDBuySetupbarninetobelessthanthecloseofTDBuySetupbareight,butthisisoptional.01_Perl_ch01.indd138/08/57:24:51PM 1DeMarkIndicators■RiskManagement:CalculatingtheTDRiskLevelforTradingaTDBuySetup1.identifytheTDBuySetupbarwiththelowesttruelow,and2.Subtractthetruerangeofthatbarfromitstruelow.(Forexample,ifTDBuySetupbareighthasthelowesttruelow,subtractthetruerangeofthatbarfromitstruelow.)Theexpectationwouldbeforareturntowardtheupper-rangeextreme,asdefinedbyTDSTResistance,inotherwords,thetruehighofthemostrecentlycompletedTDBuySetup.Typically,Iwouldtakethetradeonlyifthedifferencebetweentheentryprice(closeofTDBuySetupbarnine),andTDSTResistanceismorethan1.timesthedifferencebetweenthecloseofTDBuySetupbarnineandtheTDrisklevel.■TDSellSetup“Perfection”ThehighofTDSellSetupbarseightornineorasubsequenthighmustbegreaterthan,orequalto,thehighsofTDSellSetupbarssixandseven.TDSellSetupperfectionisdeferreduntilthathappens,and,aslongasthatsituationexists,theriskisforaretestofthepricehighofbarssixorseven,priortotheexpectedminimalresponseofaone-tofour-barconsolidation/reversal.TheabsenceofTDSellSetupperfectiondoesn’tretardtheonsetofaTDSellCountdown,butitisanimportantconsiderationforthosewhowanttotradeTDSellSetups.Toincreasetheprobabilityofenteringthemarketatornearaninterimpricehigh,tradersshouldwaitforaTDSellSetuptobeperfectedbeforeenteringashortpositionbasedonacompletedTDSellSetup(Figures1.12and1.13).tradingatDSellSetupAswiththeTDBuySetups,DeMarkdoesn’tdescribehowtraderscouldactuallydefinetheparametersforsuchasignalotherthansayingthatonecaninitiateapositionifaTDSellSetupholdsTDSTresistanceonaclosingbasis.AsearlierwiththeTDBuySetups,however,IhavemyownsetofveryclearrulesfortradingTDSellSetupsobjectively.01_Perl_ch01.indd148/08/57:24:52PM MarketcompletedaperfectedTDSellSetup(asindicatedbythedownarrow),sincethehigh1.1700ofbarTDBuySetup8or9wasabovethehighofTDBuySetupbars6and7.791.1600681.15005141.1400312251.1300TDSTsupport341.120061.1100781.1000612/71011121312/141718192012/21242526272812/3112342007Figure1.12PerfectedTDSellSetupinthechartofuSDCHF,themarketrecordsaperfectedTDSellSetupbarnine,becausethehighsofTDSellSetupbarseightornineareabovethehighsofTDSellSetupbarssixandseven.MarketcompletedaTDSellSetup,butitwasnotperfectedsincethehighofTDSellSetupbar168008or9wasbelowthehighofTDSellSetupbars6and7.AdownarrowappearedthenextdaytoindicatetheTDSellSetuphadbeenperfected.166007891640061620045231600015800115600TDSTsupport1540015200150001619202112/222627282912/304561/101112131/1617182005Figure1.13UnperfectedTDSellSetupinthechartoftheNikkei225,themarketreachesTDSellSetupbarnine,buttheTDSellSetupisnotperfected,becausethehighsofTDSellSetupbarseightorninearenotgreaterthanthehighsofTDSellSetupbarssixandseven.Thispatternshowsthatthereisanincreasedriskthatthemarketcouldcomebacktoretestthegreaterofbarssixandsevenbeforetheexpectedconsolidation/reversalmaterializes.Thereversalmaterializesthefollowingday,andthedownarrowabovethesubsequentbarindicateswheretheTDSellSetupiseventuallyperfected.101_Perl_ch01.indd158/08/57:24:58PM 1DeMarkIndicatorsFirst,althoughmanypeoplemistakenlybelievethatoneshouldinitiateashortpositionfollowingeverycompletedTDSellSetup,Iadviseagainstthatexceptunderthefollowingconditions.■Perl’sRulesonWhentoInitiateaShortPositionFollowingaCompletedTDSellSetup1.WhentheTDSellSetuphasbeenperfected,thatis,whenthehighofTDSellSetupbareightornineisgreaterthanthehighsofTDSellSetupbarssixandseven,2.WhennoneofthebarswithintheTDSellSetuphasclosedaboveTDSTresistance,and3.WhenthecloseofTDBuySetupbarnineisincloseproximitytoTDSTresistance.AswiththeTDBuySetup,Ihavemyownpreference,thatis,forthecloseofTDSellSetupbarninetobehigherthanthecloseofTDSellSetupbareight,butthisisoptional(Figure1.14).Next,assumingtheaboveconditionsaremet,andthesignalistriggeredonTDSellSetupbarnine,theTDrisklevelforsuchatrademustbecalculated.1.1800MarketcompletedaperfectedTDSellSetupaheadofTDSTresistance.GiventheproximityofTDSTresistance,onewouldsellonthecloseof123TDSellSetupbar9.Sincebar9wasthehighesthigh791.160046856intheSetup,onewouldtakethetruerangeofbar978andaddittothehighofbar9todeterminea519stop-lossontheshortposition.41.14003121.12001.100024252629301256791213141619202123262728293456101112131718192021252610/3111/811/1511/2211/3012/712/1412/24Figure1.14TradingaPerfectedTDSellSetupinthechartofuSDCHF,themarketrecordsaperfectedTDSellSetupaheadofTDSTresistance.01_Perl_ch01.indd168/08/57:25:02PM TDSequenTial17■RiskManagement:CalculatingtheTDRiskLevelforaTDSellSetup1.identifytheTDSellSetupbarwiththehighesttruehigh,and2.Addthetruerangeofthatbartoitstruehigh.(if,forexample,TDSellSetupbareighthasthehighesttruehigh,addthetruerangeofthatbartoitstruehigh,toderivetheTDSellrisklevel.)Theexpectationwouldbeforareturntowardthelower-rangeextreme,asdefinedbyTDSTsupport—inotherwords,thetruelowofthemostrecentlycompletedTDSellSetup.Typically,Iwouldtakethetradeonlyifthedifferencebetweentheentryprice—thecloseofTDSellSetupbarnine—andTDSTsupportismorethan1.timesthedifferencebetweentheTDrisklevelandthecloseofTDSellSetupbarnine.tDSetupvs.tDSequentialcountdownOnceTDSetupiscomplete,TDCountdowncanbegin,fromthecloseofbarnineofTDSetup(inclusive),onward.Thedistinctionbetweenthetwostrategiesisthis:•TDSetupcomparesthecurrentclosewiththecorrespondingclosefourbarsearlier,Whereas•TDCountdowncomparesthecurrentclosewiththelowtwobarsearlierforapotentialbuy,andcomparesthecurrentclosewiththehightwobarsearlierforaprospectivesell.ThispricerelationshipisanimportantdistinctionfromTDSetup,becausethemarketmustbetrendingforTDCountdowntoobjectivelyidentifythelikelyexhaustionpointforatrendreversal.OnecanstartlookingforthefirstbarofaTDBuyCountdownwhenaTDBuySetupisinplace.■ToInitiateTDBuyCountdownAfterTDBuySetupisinplace,lookfortheinitiationofaTDBuyCountdown.IfBarnineofaTDBuySetupalsohasacloselessthan,orequalto,thelowtwobarsearlier,01_Perl_ch01.indd178/08/57:25:02PM 1DeMarkIndicatorsThen,BarnineofaTDBuySetupbecomesbaroneofaTDBuyCountdown.IfThatconditionisnotmet,ThenTDBuyCountdownbaroneispostponeduntilitdoes,andtheTDBuyCountdowncontinuesuntilthereareatotalofthirteencloses,eachonelessthan,orequalto,thelowtwobarsearlier.UnlikeTDBuySetup,TDBuyCountdowndoesn’thavetobeanuninterruptedsequenceofqualifyingpricebars;theTDBuyCountdownprocesssimplystopswhenmarketsaretradingsideways,andresumeswhenpricesstarttrendingloweragain.ForaTDBuyCountdowntobecompleted(Figures1.15and1.16)andtohelpidentifyalow-riskbuyingopportunity,barthirteenmustmeetcertainrequirements.TDBuySetupstarts.27.50927.0012TDBuySetupends.837626.50456785926.0012433425.50HavingcompletedaTD5812SequentialBuySetup,aTD6725.00BuyCountdowncanbegin.Inthisinstance,theTDBuyCountdown9startsonthesamebarthattheTDBuy1024.501112Setupfinishes.13CompletedTDSequentialBuyCountdown24.00Sep7Sep15Sep22Sep30Oct7Oct14Oct24Oct31Nov8Figure1.15CompletedTDSequentialBuyCountdowninthechartofMicrosoft,subsequenttothecompletedTDBuySetup,themarketrecordsaseriesofthirteencloses,eachonelessthan,orequalto,thelowtwopricebarsearlier,therebycompletingaTDSequentialBuyCountdown.01_Perl_ch01.indd188/08/57:25:06PM TDSequenTial196TDBuySetupstarts.54384.0012TDBuyCountdownstopscounting12TDBuySetupends.82.004temporarilybetweenbars9and10,3asnoneofthesebarshaveaclose5thatislessthanorequaltothe6low2barsearlier.80.007891278.00TDSequentialBuy45673Countdownbegins.891076.00111274.0013CompletedTDSequentialBuyCountdown72.00May15May31Jun15Jun30Jul14Jul31Aug15Aug31Sep15Sep29Figure1.16CompletedTDSequentialBuyCountdowninthechartofiBM,themarketcompletesaTDBuySetup,butpricedoesn’tsatisfytheconditionstobeginaTDBuyCountdownuntilsevendayslater.Consequently,theTDBuyCountdownphaseisdeferreduntilthatcondition(thatis,acloselessthan,orequalto,thelowtwopricebarsearlier)isfulfilled.Note:Whenthereisaninterruptioninthesequenceofclosesthatarelessthan,orequalto,thelowstwopricebarsearlier,theTDBuyCountdownphasestopsuntiltheconditionsaremetagain,atwhichpointcountingcanresume—asisthecaseinthisinstance,betweenTDBuyCountdownbars9and10.■ToCompleteaTDBuyCountdown1.ThelowofTDBuyCountdownbarthirteenmustbelessthan,orequalto,thecloseofTDBuyCountdownbareight,and2.ThecloseofTDBuyCountdownbarthirteenmustbelessthan,orequalto,thelowtwobarsearlier.Whenthemarketfailstomeettheseconditions,thethirteenisdeferred,andaplussign(1)appearswherethenumberthirteenwouldotherwisehavebeen.Itcanbeextremelyfrustratingtoseethemarketrecoverfollowinga“deferredthirteen,”whilethetraderisstillwaitingforabuysignal.01_Perl_ch01.indd198/08/57:25:08PM 0DeMarkIndicatorsTDBuySetupEachbarmarkedwith+hasaclosethatislessthan,orequalto,thelow29.00starts.twopricebarsearlier,butdoesn’tmeetthesecondandadditionalqualifierforavalid13,i.e.,thelowofbar13mustalsobelessthanorequaltothecloseofbar8.The13appearsfinally,whenbothconditions28.00aremetonthesamepricebar.127.00TDSequentialBuy26.00235Countdownbegins.+++412++25.00++6++++++7816+++24.009++1+273513328464578923.0010TDBuySetupends.91122.00…Jan31Feb14Feb28Mar14Mar31Apr15Apr30May15May30Jun16Jun30Jul15Figure1.17DeferredTDSequentialBuyCountdowninthechartofMicrosoft,subsequenttothecompletedTDBuySetup,themarketbeginsaseriesofcloses,eachonelessthan,orequalto,thelowtwopricebarsearlier.Afterbartwelve,however,aplussignappears,indicatingthatTDBuyCountdownbarthirteenhasbeendeferred.WhenaplussignappearsbeneathaTDBuyCountdownbar,itmeansthatalthoughthecloseislessthan,orequalto,thelowtwopricebarsearlier,themarketfailstosatisfytheotherconditionthatisrequiredtoproduceathirteen(thatthelowofTDBuyCountdownbarthirteenbelessthan,orequalto,thecloseofTDBuyCountdownbareight).OnlywhenthesamepricebarsatisfiesbothconditionsdoestheTDBuyCountdownbarthirteenappear.However,aslongasaplussignispresentinlieuofabarlabeledthirteen,thereisaheightenedriskthatthemarketwillrevisitthecloseofaTDBuyCountdownbareightbeforeareversalmaterializes(Figure1.17).AmoreconservativeapproachwouldalsorequirethelowofTDBuyCountdownbareighttobelessthan,orequalto,thecloseofTDBuyCountdownbarfive,butDeMarkconsidersthisanelectiveoptionratherthanaprerequisite.Patienceanddisciplineshouldalwaysruletheday.Neverpreemptasignal.AsmyformercolleagueDavidTothusedtosay,“Bettertobeoutofatrade,wishingyouwereinit,thantobeinatrade,wishingyouwereoutofit.”01_Perl_ch01.indd208/08/57:25:11PM TDSequenTial1tDBuycountdowncancellationAlthoughadevelopingTDBuyCountdowndoesn’tresetitselfifthereisaninterruptioninthesequenceofcloseseachoneofwhichislessthan,orequalto,thelowtwobarsearlier,thereareanumberofbuilt-inconditions,orfilters,tohelpthetraderrecognizewhenthedynamicsofthemarketarechanging.Thesefilterserasetheas-yet-incompleteTDBuyCountdown.■FiltersThatCancelaDevelopingTDBuyCountdowneitherofthefollowingconditionserasesanincompleteTDBuyCountdown:1.ifthepriceactionralliesandgeneratesaTDSellSetup,or2.ifthemarkettradeshigherandpostsatruelowabovethetruehighofthepriorTDBuySetup—thatis,TDSTresistance.DeMarkiscurrentlyinvestigatingasubtlechangehere,wherebythefourpricebarspriortothestartoftheTDBuySetupwouldalsobeincluded,todeterminethereferencelevelfortheTDSetupextreme;thatis,themarketwouldneedatruelowabovethetruehighofthepriorTDBuySetup,includingthefourpricebarspriortobaroneoftheTDBuySetup.tDBuycountdowncancellationandrecycleQualifiersComparethetruerangeofthepreviousTDBuySetup,thatis,thedifferencebetweenthehighesttruehighandthelowesttruelow,withthetruerangeofthemostrecentlycompletedTDBuySetup,andthenapplytheTDBuyCountdownCancellationqualifiersIandII.■TDBuyCountdownCancellationQualifierIIfThesizeofthetruerangeofthemostrecentlycompletedTDBuySetupisequalto,orgreaterthan,thesizeofthepreviousTDBuySetup,butlessthan1.618timesitssize,01_Perl_ch01.indd218/08/57:25:12PM DeMarkIndicatorsThenATDSetuprecyclewilloccur;thatis,whicheverTDBuySetuphasthelargertruerangewillbecometheactiveTDBuySetup.Whencomparingtherespectiveranges,keepinmindthataTDBuySetupcanextendbeyondTDSetupbarnine,ifthereisnosubsequentTDPriceFliptoextinguishit.■TDBuyCountdownCancellationQualifierII(aTDBuySetupWithinaTDBuySetup)IfThemarkethascompletedaTDBuySetupthathasaclosingrangewithinthetruerangeofthepriorTDBuySetup,withoutrecordingaTDSellSetupbetweenthetwo,AndifThecurrentTDBuySetuphasapriceextremewithinthetruerangeofthepriorTDBuySetup,ThenThepriorTDBuySetupistheactiveTDSetup,andtheTDBuyCountdownrelatingtoitremainsintact.Whencomparingranges,keepinmindthat,aswithTDCancellationQualifierI,aTDBuySetupcanextendbeyondTDSetupbarnineifthereisnoTDPriceFliptoextinguishit.tDBuycountdownrecycleQualifierTheletterR(forrecycle)willappearonachart(Figure1.18)whereTDBuyCountdownbarthirteenwouldotherwisehavebeenifthefollowingconditionismet.■AnRWillAppearWhenaTDBuySetupthatbeganbefore,on,orafterthecompletionofadevelopingTDBuyCountdown,butpriortoabullishTDPriceFlip,extendstoeighteenbars—thatis,eighteencloses,witheachonelessthantheclosefourpricebarsearlier.01_Perl_ch01.indd228/08/57:25:12PM TDSequenTialTDBuySetupstarts.7.100012347.00005187269546.9000367TDBuySetupends.896.8000AnRappearswhereaTDBuyCountdownwouldhaveotherwisebeen.TheRistherebecausetheTDBuySetup,whichbeganpriortothecompletionoftheTDBuyCountdown,extendedbeyondeighteenconsecutiveR6.7000closeslessthantheclosefourpricebarsearlier.8912131416192021232627282923456101112131718192024252627123473/153/223/304/94/164/234/30Figure1.18ExtensionofTDBuySetupfromNinetoEighteenRecyclesaDevelopingTDBuyCountdowninthechartofuSDSeK,ratherthanstoppingatnineconsecutivecloseseachlessthantheclosefourpricebarsearlier,thesecondTDBuySetup,whichbeginspriortothecompletionoftheTDBuyCountdown,extendstoeighteencloseseachonelessthantheclosefourpricebarsearlier.ThissuggestssellingpressureisgainingmomentumandthereforerecyclestheTDBuyCountdown.TheletterRnowappearswheretheTDSequentialBuyCountdownbarthirteenwouldotherwisehavebeen.Suchanoccurrenceismeaningful,becauseitisanacknowledgmentthatmomentumisverystrong,andtheunderlyingbeartrendhasintensified.ThereisamisconceptionthattheTDSetupprocessstopsoncethecountreachesnine.Inactualfact,theTDBuySetupprocesscancontinueindefinitely,aslongastheuninterruptedseriesofcloses,eachoneofwhichislessthantheclosefourpricebarsearlier,persists.WhilechartingsystemsdefaulttodisplayTDBuySetupsonlyuptobarnine,theSetupcontinuesuntiladownsideTDPriceFlipoccurs.Note:TheextentofaTDSetupbeyondninecanbeseenbycheckingtheTDSetupshadingboxintheTDSequentialpropertiessectionandhighlightingtheareacoveredbyconsecutivecloseseachonelessthantheclosefourpricebarsearlier.01_Perl_ch01.indd238/08/57:25:16PM DeMarkIndicatorsTDBuySetupstarts.1.30001.2800121.2600TDBuySetupends.536491.2400781.22001345621.2000TDSequentialBuy7ThemoreconservativeapproachwaitsCountdownbegins.8912forthefirstinstancewhen,subsequent101.18001113toa13Buy,themarketrecordsacloseCompletedTDSequentialBuyCountdownabovetheclosefourpricebarsearlier.Feb27Mar15Mar31Apr15Apr30May14May31Jun15Jun30Figure1.19AggressiveApproachtoEnteringaLongPositionAfteraCompletedTDBuyCountdowninthechartofeuruSD,themarketcompletesaTDBuyCountdown,andalongpositionisestablishedonthecloseofTDBuyCountdownbarthirteen(aggressiveapproach).ThemoreconservativeapproachistowaitforaconfirmedbullishTDPriceFlipsubsequenttothethirteen(thatis,aclosegreaterthantheclosefourpricebarsearlier),toeliminatetheriskofpricesrecycling.enteringaLongpositionFollowingacompletedTDSequentialBuyCountdownthirteen,traderscaninitiatealongposition(Figure1.19)usingoneofthefollowingoptions(mypersonalpreferencebeing“aggressive”).■TwoWaystoEnteraLongPositionAggressiveApproach:BuyonthecloseofaTDBuyCountdownbarthirteen,orConservativeApproach:SubsequenttoaTDSequentialBuyCountdownthirteen,waitforthefirstinstancewhenthecloseisgreaterthantheclosefourpricebarsearlier—i.e.,abullishTDPriceFlip.Althoughthelatterapproachmayprovidealess-efficiententrypoint,iteliminatestheriskthatthemarketwillrecycle.01_Perl_ch01.indd248/08/57:25:19PM TDSequenTialalternativeStrategyforenteringaLongpositionAsalternatives,DeMarksuggestsyoucanenteralongpositionusingTDCamouflage,TDClop,TDClopwin,TDOpen,orTDTrap,allofwhicharedescribedbelow.Youcanusealltheseindicatorsinisolation,buttheyaremorepowerfulwhenusedinconjunctionwithTDSequentialorTDCombosignal.■RequirementsforaTDCamouflageBuy1.Thecloseofthecurrentpricebarmustbebelowthecloseofthepreviouspricebar,2.Thecloseofthecurrentpricebarmustbeabovetheopenofthecurrentpricebar,and3.Thelowofthecurrentpricebarmustbelowerthantruelowtwopricebarsearlier.Whenthispatternisconfirmed,youwouldinitiatelongpositionsontheclose.ATDClopbuysignalworksontheassumptionthatupsidemomentumwillcontinuewhenthemarketexceedstheopenandclosepriceofthepriorpricebar.■RequirementsforaTDClopBuySignal1.Theopenofthecurrentpricebarmustbebelowthecloseandopenofthepreviouspricebar,and2.Themarketmustsubsequentlytradeaboveboththeopenandcloseofthepreviousbar.Iftheseconditionsaremet,thereisagreaterchancethatupsidemomentumwillcontinueintotheclose.ATDClopwinbuysignalexaminestherelationshipbetweentheopenandcloseofthecurrentpricebarandtheopenandcloseofthepreviouspricebar.01_Perl_ch01.indd258/08/57:25:19PM DeMarkIndicators■RequirementsforaTDClopwinBuySignal1.Theopenandcloseofthecurrentpricebarmustbecontainedwithintheopenandcloserangeofthepreviouspricebar,and2.Thecloseofthecurrentpricebarmustbeabovethecloseofthepriorpricebar.Meetingtheseconditionsincreasestheprobabilitythatupsidemomentumwillbesustainedintothenextpricebar,therebyrein-forcingtheTDSequentialbuysignal.■RequirementsforaTDOpenBuySignal1.Thecurrentpricebar’sopenmustbelessthanthelowofthepriorpricebar,and2.itmustthentradeabovethatlow.■RequirementsforaTDTrapBuySignalTheopenofthecurrentpricebar1.Mustbewithintherangeofthepreviouspricebar,and2.Mustthenbreakabovethehighofthatrange.tDBuyterminationcountIprefertocomparethecloseofTDBuyCountdownbarthirteenwiththelowtwopricebarsearlier,butamoreaggressiveversionofTerminationCount,whichDeMarkrecommends,istocomparetheopenonTDBuyCountdownbarthirteenwiththelowtwodaysearlier.■RiskManagement:ForaTDBuyCountdownFollowingacompletedTDSequentialBuyCountdown:1.identifythelowesttruelowthroughouttheTDSequentialBuyCountdownprocess,whichincludesbarsonethroughthirteen,whetherornotitisanumberedpricebar;2.Calculatethedifferencebetweenthetruehighandtruelowforthatbar;and3.Subtractthattruerangefromitstruelow.ManytraderstakethevalueofthetruerangeofthebarwiththelowesttruelowandsubtractitfromthelowofTDBuyCountdownbarthirteen,butthiswouldbecorrectonlyifTDBuyCountdown01_Perl_ch01.indd268/08/57:25:20PM TDSequenTial7barthirteenhappenedtohavethelowesttruelow.Accordingly,ifTDBuyCountdownbartwelvehadthelowesttruelow,thenthecorrectactionwouldbetotakethetruerangeofCountdownbartwelveandsubtractitfromthelowofTDBuyCountdownbartwelve(Figure1.20).Byimplication,ifmarketsareexperiencinghighvolatilityinthelead-uptothesignal,thenawidestop-lossislikely,but,ifvolatilityislowleadinguptothesignal,thenafairlytightstop-lossislikely.Whatissignificantisthatyou’relettingpriceaction,ratherthananarbitraryfixedamount,determinetherisklevel.Note:Traderscan,forexample,stillopttorisk1percentofcapitalonatrade,buttheyshouldreducepositionsizetoaccommodatetherequiredTDSequentialrisklevel.Forexample,wheretheriskonasinglepositionmightordinarilybe1percentofequity,andtherequiredTDSequentialrisklevelis2percent,tradersshouldhalvetheamounttheywouldotherwisehavetraded.TDBuyCountdownbar12hasthelowest678.10008truelow,sotherisklevelinthisinstanceis59TDBuySetupstarts.4derivedfromthetruerangeofTDBuy8.0000Countdownbar12subtractedfromthetrue2lowofTDBuyCountdownbar12.3TDBuySetupends.11237.9000456789127.800034567TDSequentialBuyCountdown87.7000begins.91011CompletedTDSequential12137.6000BuyCountdownAug31Sep7Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Nov22Figure1.20CalculatingtheRiskLevelFollowingaTDSequentialBuySignalinthechartofeurNOK,ofalltheTDCountdownbars(onetothirteeninclusiveaswellasthosebarsthataren’tnumbered),TDCountdownbartwelvehasthelowesttruelow.TocalculatetheTDrisklevel,wethereforetakethevalueofthetruerangeofthatbarandsubtractitfromitstruelow.01_Perl_ch01.indd278/08/57:25:24PM DeMarkIndicatorsFrequentlyaskedQuestionsWhatconstitutesavaliddownsidebreakofaTDSequentialBuyCountdownrisklevel?DeMarkrecommendsfollowingtheserulestodetermineavaliddownsidebreak(thepricebarthatviolatestheTDrisklevelisbarX):1.ThecloseofpricebarXneedstobebelowthedownsideTDrisklevel,2.ThecloseofpricebarX21mustbehigherthanthecloseofpricebarX2,3.TheopenofpricebarX11mustbeadownopen,and4.ThelowofpricebarX11mustbeatleastonetickbelowtheopenofpricebarX11.Myownpreferenceistostopoutofalongpositionassoonasthedownsiderisklevelisviolatedonanintrabarbasis.Frompersonalexperience,IhavefoundthateithertheTDBuyCountdownrisklevelholds,orthemarketacceleratesthroughit.SincetherearefewerinstancesinwhichthemarketviolatestheTDBuyrisklevelandthenreverses,I’dratherknowmyup-frontriskthanincuranunknown,potentiallysubstantiallosswhileIwaitforthefour-stepprocessabovetobesatisfied.HowmuchtimeshouldbeallowedforthemarkettorespondtoaTDSequentialbuysignal?Ideally,themarketshouldhaveameaningfulresponsewithintwelvepricebars.AcloseabovetheclosefourpricebarsearliereliminatestheriskofaTDRecycle,andsothatisanimportantreinforcingfactor,butitispreferableforthemarkettotradeabovetheTDReferenceClose(thatis,thehighestclosefourpricebarsbeforethetrendlow)upuntilthepointwhenthebuysignalwasgenerated—withintwelvepricebarsoftheTDCountdownthirteenbuy.WhataretherequirementsforaTDSequential9-13-9BuyCount?FollowingtheTDBuyCountdownbarthirteen,themarkettemporarilytradeshigher—producingabullishTDPriceFlip—butsubsequentlytradesloweragainandgoesontorecordaTDBuySetup.01_Perl_ch01.indd288/08/57:25:25PM TDSequenTial9ATDSequential9-1-9BuyCountprovidesafreshopportunitytofadetheunderlyingdowntrendandinitiatealongposition,buttovalidatethesignal,thefollowingconditionsmustoccur.■RequirementsforValidationofaTDSequential9-13-9BuyCount1.TheTDBuySetupmustnotbeginbeforeoronthesamepricebarasthecompletedTDBuyCountdown,2.TheensuingbullishTDBuySetupmustbeprecededbyaTDPriceFlip,and3.NocompletedTDSellSetupshouldoccurpriortotheappearanceoftheTDBuySetup.Oncetheseconditionsaresatisfied,afreshlongpositioncanbeestablishedonthecloseofthecompletedTDSequential9-1-9(Figures1.21,1.22,and1.23).AlthoughDeMarkdoesn’toutlinehowto50.0049.00ThisisavalidTDSequential9-13-9BuyCountdown48.002becausesubsequenttotheTDCountdown13,there1323wasaTDPriceFlip(closeabovetheclosefourbars47.0054earlier),thenanewTDBuySetup.46.00664445.0079958844.00681171212143.0099138234910109657842.00Jul20Jul31Aug8Aug15Aug23Aug31Sep7Sep14Sep21Figure1.21QualifiedTDSequential9-13-9BuySignalinthechartofBMW,themarketrecordsaTDSequentialBuyCountdown.AlthoughthemarketralliesinitiallyaftergeneratingabullishTDPriceFlip,(thatis,aclosehigherthantheclosefourpricebarsearlier),themarketfailstosustainthosegainsand,withoutfirsthavingproducedaTDSellSetup,itsellsoffagaintocompleteafreshTDBuySetup,whichgeneratesaTDSequential9-13-9buysignal.ThesignalisparticularlycompellingbecausetherisklevelonthepriorTDSequentialBuyCountdownisstillintact.01_Perl_ch01.indd298/08/57:25:30PM 1.260011.2400234561.22007892131.2000458123912134671011ThisdoesnotqualifyasavalidTD1.1800Sequential9-13-9buycountdown56becausetheTDBuySetupbeganpriortothecompletionoftheTD789BuyCountdown.1.1600Sep15Sep30Oct14Oct31Nov15Nov30Dec15Dec302005Jan16Figure1.22DisqualifiedTDSequential9-13-9BuySignalinthechartofeuruSD,themarketcompletesaTDBuySetupsubsequenttoaTDBuyCountdown.Note,however,thatbecausetheTDBuySetupbeginspriortothecompletionoftheTDBuyCountdown,thisdoesnotqualifyasaTDSequential9-13-9buysignal.Thereis,consequently,noBullishTDPriceFlipseparatingtheTDBuySetupfromtheTDBuyCountdown.14.00ThisdoesnotqualifyasavalidTDSequential9-13-9buy1countdownbecausetherewasaTDSellSetupbetween13.502theTDBuyCountdownandtheTDBuySetup.3413.00519684579681232347312115612.50891012134776589Oct21Oct31Nov8Nov15Nov22Nov30Dec8Dec15Dec23Jan9Jan16Jan23Jan31Feb7Dec302005Figure1.23DisqualifiedTDSequential9-13-9BuySignalinthechartofTelefonica,themarketcompletesaTDBuyCountdown.There’saTDSellSetup,however,betweenthatandthesubsequentTDBuySetup,whichmeansthatthisdoesnotqualifyasavalidTDSequential9-13-9buysignal.001_Perl_ch01.indd308/08/57:25:34PM TDSequenTial1determinearisklevelforthissortoftrade,Ihavedevelopedmyownmethod.■RiskManagement:ForTDSequential9-13-9SubtractthetruerangeofthepricebarwiththelowesttruelowintheTDBuyCountdownandensuingTDBuySetupfromthetruelowofthatbar.tDSellcountdownAssoonasaTDSellSetupisinplace,wecanstartlookingforthefirstbarofaTDSellCountdown;barnineofaTDSellSetupcanalsobebaroneofaTDSellCountdownifitsatisfiesthefollowingconditions.■RequirementforaTDSellCountdownWithbarnineoftheTDSellSetupinplace,theremustbeaclosegreaterthan,orequalto,thehightwobarsearlier.BaroneoftheTDSellCountdownispostponeduntiltherequirementissatisfied.UnlikeTDSellSetup,theTDSellCountdowndoesn’thavetobeanuninterruptedsequenceofqualifyingpricebars.TheTDSellCountdownprocesspauseswhenmarketsaretradingsideways,resumeswhenpricesstarttrendinghigheragain,andcontinuesuntilthereisatotalofthirteencloses,eachonegreaterthan,orequalto,thehightwobarsearlier(Figures1.24and1.25).■ToCompleteaTDSellCountdown1.ThehighofTDSellCountdownbarthirteenmustbegreaterthan,orequalto,thecloseofTDSellCountdownbareight,and2.ThecloseofTDSellCountdownbarthirteenmustbegreaterthan,orequalto,thehightwobarsearlier.Whenthemarketfailstomeettheseconditions,TDSellCountdownbarthirteenisdeferred,andaplussignappearswhere01_Perl_ch01.indd318/08/57:25:35PM CompletedTDSellCountdown810091078135612+8000TDSellSetupends.4237900117189578006TDSellCountdownstarts.13277004476001237500TDSellSetupstarts.7400Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Figure1.24CompletedTDSequentialSellCountdowninthechartofthegermanDAXindex,subsequenttothecompletedTDSellSetup,themarketgoesontorecordaseriesofthirteencloses,eachonegreaterthan,orequalto,thehightwopricebarsearlier,therebycompletingaTDSequentialSellCountdown.TDSellSetupends.TDSellCountdownstarts.CompletedTDSellCountdown86006711556789910121312344789123632455501TDSellSetupstarts.500450123564784009Aug22Aug31Sept7Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Figure1.25CompletedTDSequentialSellCountdowninthechartofJSainsburyPLC,themarketcompletesaTDSellSetup,butthepricedoesn’tsatisfytheconditionstobeginaTDSellCountdownuntilfivebarslater.Consequently,theTDSellCountdownphaseisdeferreduntilthatcondition—aclosegreaterthanorequaltothehightwopricebarsearlier—isfulfilled.NotethatwhenthereisaninterruptionintheTDSellCountdownsequenceofclosesgreaterthan,orequalto,thehightwopricebarsearlier,theTDSellCountdownphasestopsuntiltheconditionsaremetagain.Atthatpointcountingcanresume;inthiscasetheinterruptionoccursbetweenTDSellCountdownbarselevenandtwelve.01_Perl_ch01.indd328/08/57:25:42PM TDSequenTialTDSellCountdownstarts.9168.0010968135971213166.005678+++3411+++21034++121112164.00TDSell9+6781Setupstarts.162.00345160.0021158.00Eachbarmarkedwith+hasaclosethatishigherthanorequaltothehightwopricebarsearlier,butdoesn’tmeetthesecondand156.00additionalqualifierforavalid13,i.e.,thehighofbar13mustalsobegreaterthanorequaltothecloseofbar8.The13appears154.00finally,whenbothconditionsaremetonthesamepricebar.Aug31Sep14Sep28Oct15Oct31Nov15Nov30Dec14Dec312007Figure1.26DeferredTDSequentialSellCountdowninthechartofeurJPY,subsequenttothecompletedTDSellSetup,themarketbeginsaseriesofcloses,eachonegreaterthan,orequalto,thehightwopricebarsearlier.However,afterTDSellCountdownbartwelve,aplussignappears,indicatingTDSellCountdownbarthirteenhasbeendeferred.intheinstancesofabarmarkedwithaplussign,thecloseisgreaterthan,orequalto,thehightwopricebarsearlier,butthemarkethasfailedtosatisfytheadditionalconditionnecessarytoproduceabarthirteen:ThehighofTDSellCountdownbarthirteenmustalsobegreaterthan,orequalto,thecloseofTDBuyCountdownbareight.OnlywhenonepricebarsatisfiesbothconditionsdoestheTDSellCountdownbarthirteenappear.TDSellCountdownbarthirteenwouldhaveotherwisebeen(Figure1.26).Itcanbeextremelyfrustratingtoseethemarketdeclineaftera“deferredthirteen,”whenasellsignalhasstillnotappeared.However,aslongasaplussignispresentinlieuofabarlabeledthirteen,thereisaheightenedriskthemarketwillrevisitthecloseofaTDSellCountdownbareightbeforeareversalmaterializes.AmoreconservativeapproachwouldalsorequirethehighofTDSellCountdownbareighttobegreaterthan,orequalto,thecloseofTDSellCountdownbarfive,butDeMarkconsidersthisanelectiveoptionratherthanaprerequisite.01_Perl_ch01.indd338/08/57:25:45PM DeMarkIndicatorstDSellcountdowncancellationAlthoughadevelopingTDSellCountdowndoesn’tresetitselfifthereisaninterruptioninthesequenceofclosesgreaterthan,orequalto,thehightwobarsearlier,built-infiltersrecognizewhenthedynamicsofthemarketarechanging.Thesefilterscanceltheas-yet-incompleteTDSellCountdown.■FiltersThatWillCancelaDevelopingTDSellCountdowneitherofthefollowingconditionserasesanincompleteTDSellCountdown:IfPriceactionleadstoaselloff,andaTDBuySetupisgenerated,OrThemarkettradeslower,andpostsatruehigh,belowthetruelowofthepriorTDSellSetup(thatis,TDSTsupport).DeMarkiscurrentlyinvestigatingasubtlechangetothisindicator,wherebythefourpricebarspriortothestartoftheTDSellSetuparealsoincluded,todeterminethereferencelevelfortheTDSellSetupextreme;thatis,themarketwouldneedatruehighbelowthetruelowofthepriorTDSellSetup,includingthefourpricebarspriortobaroneoftheTDSellSetup.tDSellcountdowncancellationandrecycleQualifiersComparethetruerangeofthepreviousTDSellSetup,thatis,thedifferencebetweenthehighesttruehighandthelowesttruelow,withthetruerangeofthemostrecentlycompletedTDSellSetup,andthenapplytheTDSellCountdownCancellationqualifiersIandII.■TDSellCountdownCancellationConditionIIfThesizeofthetruerangeofthemostrecentlycompletedTDSellSetupisequalto,orgreaterthan,thesizeofthepreviousTDSellSetup,butlessthan1.618timesasbig,01_Perl_ch01.indd348/08/57:25:46PM TDSequenTialThenATDCountdownCancellationwilloccur.WhicheverTDSellSetuphasthelargertruerangewillbecometheactiveTDSellSetup.■TDSellCountdownCancellationConditionII(aTDSellSetupWithinaTDSellSetup)IfThemarketcompletesaTDSellSetupwithaclosingrangewithinthetruerangeofthepriorTDSellSetup,withoutrecordingaTDBuySetupbetweenthetwo,andthecurrentTDSellSetuphasanextremeclose,tocloserangewithinthetruerangeofthepriorTDSellSetup,ThenThepriorTDSellSetupistheactiveTDSetup,andtheTDSellCountdownrelatedtoitremainsintact.Whencomparingtherespectiveranges,aswithTDCancellationqualifierconditioni,takeintoconsiderationthatTDSellSetupcanextendbeyondnineifthereisnoTDPriceFliptoextinguishit.■TDSellCountdownRecycleQualifierFollowingacompleteTDSequentialSellCountdownthirteen,traderscaninitiateashortpositionusingeithertheaggressiveorconservativeapproach,mypersonalpreferencebeingtheaggressive.IfATDSellSetupextendstoeighteenbars(thatis,eighteencloseseachonegreaterthantheclosefourpricebarsearlierpriortotheoccurrenceofaTDPriceFlip),ThenThepriorTDSellCountdownisnegatedandtheletterRwillappearonthechartwhereTDSellCountdownbarthirteenwouldhaveotherwisebeen.Note:TheappearanceoftheRismeaningfulbecauseitisanacknowledgementthatmomentumisverystrongandtheunderlyingbulltrendhasintensified(Figure1.27).■EnteringaShortPositionFollowingaCompletedThirteenTDSequentialSellCountdownAggressiveApproach:SellonthecloseofTDSellCountdownbarthirteenorConservativeApproach:SubsequenttoaTDCountdownthirteen,waitforthefirstinstanceinwhichthecloseislessthantheclosefourpricebarsearlier—i.e.,abearishTDPriceFlip.01_Perl_ch01.indd358/08/57:25:46PM DeMarkIndicatorsAnRappearswhereaTDSellCountdownwouldhaveotherwisebeen.TheRistherebecausethe9151.008TDSellSetup,whichbeganpriortothe7completionoftheTDSellCountdown,extended456150.00beyondeighteenconsecutiveclosesgreater123thantheclosefourpricebarsearlier.149.00689R57342148.00195147.00246783146.001145.00144.00Jun22Jun30Jul7Jul14Jul24Jul31Aug8Aug15Aug23Aug31Figure1.27ExtensionofTDSellSetupfromNinetoEighteenRecyclesaDevelopingTDSellCountdowninthechartofeurJPY,ratherthanstoppingatnineconsecutivecloses,eachgreaterthantheclosefourpricebarsearlier,theTDSellSetupextendstoeighteencloses,eachgreaterthantheclosefourpricebarsearlier.Thissuggestsbuyingpressureisgainingmomentum,andthereforetheTDSellCountdownisrecycled.TheletterRnowappearswheretheTDSequentialSellCountdownthirteenwouldhavebeen.Whiletheconservativeapproacheliminatestheriskofthemarket’srecycling,itprovidesalessefficiententrypoint,andhencemypreferenceforthemoreaggressiveapproach(Figure1.28).alternativeStrategyforenteringaShortpositionDeMarksuggestsyoucanenterashortpositionusingTDCamouflage,TDClop,TDClopwin,TDOpen,orTDTrap,eachofwhichcanbeusedalonebutismorepowerfulusedinconjunctionwithTDSequentialorTDComboSignals.01_Perl_ch01.indd368/08/57:25:50PM TDSequenTial7Themoreconservativeapproachwaitsforthefirstinstancewhen,subsequenttoa13Sell,the80.0013marketrecordsaclosebelowtheclosefourpricebarsearlier.78.00CompletedTDSequentialSellCountdown9111276.001081774.00562543TDSellSetupends.4672.0023781991870.0067324TDSequentialSellCountdownbegins.68.005341266.00564.00TDSellSetupstarts.6Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Figure1.28AggressiveApproachforEnteringaShortPositionAfteraCompletedTDSellCountdowninthechartofDaimler,themarketcompletesaTDSellCountdown,andashortpositionisestablishedonthecloseofTDSellCountdownbarthirteen.ConservativeapproachforenteringashortpositionafteracompletedTDSellCountdown.ratherthanestablishingashortpositiononthecloseofTDSellCountdownbarthirteen,themoreconservativeapproachistowaitforaconfirmedbearishTDPriceFlip—subsequenttothethirteen—thatis,acloselessthantheclosefourpricebarsearlier,toeliminatetheriskthatpriceswillrecycle.■TDCamouflageSellSignalRequirements1.Thecloseofthecurrentpricebarmustbeabovethecloseofthepreviouspricebar,2.Thecloseofthecurrentpricebarmustbebelowtheopenofthecurrentpricebaropen,and3.Thehighofthecurrentpricebarhighmustbeabovethetruehightwopricebarsearlier.Shortpositionswouldbeinitiatedontheclosewhenthispatternhasbeenconfirmed.01_Perl_ch01.indd378/08/57:25:54PM DeMarkIndicators■TDClopSellSignalRequirements1.Downsidemomentummustcontinuewhenthemarketexceedstheopenandclosepriceofthepriorpricebar,2.Theopenofthecurrentpricebarmustbeabovethecloseofthepreviouspricebarandopen,and3.Themarketmustsubsequentlytradebelowboththeopenandcloseofthepreviouspricebar.Meetingtheseconditionsincreasestheprobabilitythatdownwardmomentumwillcontinueintotheclose.■TDClopwinSellSignalRequirements1.Theopenandcloseofthecurrentpricebarmustbecontainedwithintheopenandcloserangeofthepreviouspricebar,and2.Thecloseofthecurrentpricebarmustbebelowthecloseofthepriorpricebar.Meetingtheseconditionsincreasestheprobabilitythatdownwardmomentumwillbesustainedintothenextpricebar,therebyreinforcingtheTDSequentialsellsignal.■TDOpenSellSignalRequirements1.Theopenofthecurrentpricebarmustbeabovethehighofthepriorpricebar,and2.itmustthentradebelowthathigh.■TDTrapSellSignalRequirements1.Thecurrentpricebar’sopenmustbewithinthepreviouspricebar’srange,and2.itmustthenbreakbelowthelowofthatrange.tDSellterminationcountIprefertocomparethecloseofTDSellCountdownbarthirteenwiththehightwopricebarsearlier.DeMarkrecommendsthemoreaggressiveopensetting,whichcomparestheopenofTDCountdownbarthirteenwiththehightwopricebarsearlier.01_Perl_ch01.indd388/08/57:25:55PM TDSequenTial9■RiskManagement:ForaTDSellCountdownFollowingacompletedTDSequentialSellCountdown,1.identifythehighesttruehighthroughouttheTDSequentialSellCountdownprocess,whichincludesbarsonethroughthirteen,whetherornotitisanumberedpricebar,2.Calculatethedifferencebetweenthetruehighandtruelow(therange)forthatbar,and3.Addthattruerangetoitstruehigh.DonottakethevalueofthetruerangeofthebarwiththehighesttruehighandaddittothehighofTDSellCountdownbarthirteen—unlessTDSellCountdownbarthirteenhappenstohavethehighesttruehigh,suchas,forexample,ifTDSellCountdownbartwelvehasthehighesttruehigh.Ifthisoccurs,youwouldtakethetruerangeofTDSellCountdownbartwelveandaddittothehighofTDSellCountdownbartwelve.Byimplication,ifmarketsareexperiencinghighvolatilityinthelead-uptothesignal,thenawidestop-lossislikely,but,ifvolatilityislowleadinguptothesignal,thenafairlytightstop-lossislikely.Thekeyfactoristhatyou’relettingpriceaction—ratherthananarbitraryfixedamount—determinetherisklevel(Figure1.29).Youcanstillopttoriskthesamepercentageofcapital,butyoushouldreducepositionsizerelativetotherequiredTDSequentialrisklevel.Forexample,ifyouwouldordinarilyrisk1percentofequityonasingleposition,andtheTDSequentialrisklevelispercent,thenhalvetheamountyouwouldotherwisehavetraded.FrequentlyaskedQuestionsWhatconstitutesavalidbreakofaTDSequentialSellCountdownrisklevel?Todetermineavalidupsidebreak,DeMarkrecommendsthefollowing(thepricebarthatviolatestheTDSellriskleveltotheupsideisbarX):1.ThatthecloseofpricebarXbeabovetheTDSellrisklevel,2.ThatthecloseofpricebarX21belowerthanthecloseofpricebarX2,01_Perl_ch01.indd398/08/57:25:55PM 0DeMarkIndicatorsTDBuyCountdownbar12hasthehighesttruehigh,sotherisklevelinthisinstanceisderivedfromthetruerangeofTDBuyCountdownbar12addedtothetruehighofTDSell12131.08007Countdownbar12.11569104TDSellSetupends.81.06003423121591.040086745623TDSellCountdownstarts.1.0200711.000089230.9800TDSellSetupstarts.140.960056Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Nov22Figure1.29CalculationoftheRiskLevelFollowingaTDSequentialSellSignalinthechartofAuDCHF,bartwelveofTDCountdownbarsonethroughthirteen(whichincludeallbars,numberedornot)hasthehighesttruehigh.TocalculatetheTDrisklevel,addthevalueofthetruerangeofthatbartothevalueofitstruehigh.3.ThattheopenofpricebarX11beanupopen,and4.ThatthehighofpricebarX11beatleastonetickaboveitsopen.Mypreferenceistostopoutofashortpositionassoonastheupsiderisklevelisviolatedonanintrabarbasis,since,usually,eithertheTDSellrisklevelholdsorthemarketacceleratesthroughit.OnlyrarelydoesthemarketviolatetheTDSellrisklevelandthenreverse.I’dpreferknowingmyup-frontriskthanincurringanunknownandpotentiallysubstantiallosswaitingforthefour-stepprocessabovetobesatisfied.HowmuchtimeshouldbeallowedforthemarkettorespondtoaTDSequentialsellsignal?Ideallythemarketshouldhaveameaningfulresponsewithintwelvepricebars.Althoughacloselessthantheclosefourprice01_Perl_ch01.indd408/08/57:26:00PM TDSequenTial1barsearliereliminatestheriskofaTDRecycle,andisthereforeanimportantreinforcingfactor,itispreferablethatthemarkettradebelowtheTDReferenceClose,thatis,thelowestclosefourpricebarsbeforethetrendhigh,upuntilthepointwhenthesellsignalwasgeneratedandwithintwelvepricebarsoftheTDCountdownthirteensell.WhataretherequirementsforTDSequential9-13-9SellCount?If,followingaTDSellCountdownthirteen,themarkettemporarilytradeslowerandproducesaTDPriceFlipandsubsequentlygoesontorecordaTDSellSetup,thenwhatisknownasaTDSequential9-1-9SellCountoccurs,whichprovidesafreshopportunitytofadetheunderlyinguptrendandinitiateashortposition.■RequirementsforValidatingaTDSequential9-13-9SellCount1.TheTDSellSetupmustnotbeginbeforeoronthesamepricebarasthecompletedTDSellCountdown,2.TheensuingTDSellSetupmustbeprecededbyabearishTDPriceFlip,and3.TheremustbenocompletedTDBuySetuppriortotheappearanceoftheTDSellSetup.ToallowtheestablishmentofafreshshortpositiononthecloseofthecompletedTDSequential9-1-9,theTDSequential9-1-9SellCountmustbevalidated(Figures1.30,1.31,and1.32).■RiskManagement:ForaTDSequential9-13-9SellCountAlthoughDeMarkdoesn’toutlinehowtodeterminearisklevelforthissortoftrade,mypreferenceisto:AddthetruerangeofthepricebarwiththehighesttruehighintheTDSellCountdownandsubsequentTDSellSetuptothetruehighofthatbar,andtousethatasmyrisklevel.01_Perl_ch01.indd418/08/57:26:00PM ThisisavalidTDSequential9-13-9SellCountdown18500becausesubsequenttotheTDCountdown13,there9wasaTDPriceFlip(belowtheclosefourbarsearlier),678thenanewTDSellSetup.451800032117500121311910867170005134R9256781650043116000215500Nov15Nov30Dec15Dec29Jan15Jan31Feb14Feb28Mar152006Figure1.30QualifiedTDSequential9-13-9SellSignalinthechartoftheNikkei225,themarketrecordsaTDSequentialSellCountdown.AlthoughexhibitinganinitialdeclineaftergeneratingaBearishTDPriceFlip—thatis,acloselessthantheclosefourpricebarsearlier—themarketfailstosustainthoselossesand,withouthavingfirstproducedaTDBuySetup,ralliesagain,tocompleteafreshTDSellSetup,andtherebygenerateaTDSequential9-13-9SellSignal.ThisdoesnotqualifyasavalidTDSequential9-13-9SellCountdownbecausetheTDSellSetupbeganpriortothe9completionoftheTDSellCountdown.8125657412131011892396781120467513245392167811553421110105Sep7Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Nov22Figure1.31DisqualifiedTDSequential9-13-9SellSignalinthechartofCADJPY,althoughthemarketcompletesaTDSellSetupsubsequenttotheTDSellCountdown,notethattheTDSellSetupbeginspriortothecompletionoftheTDSellCountdown.BecauseofthisandbecausethemarketconsequentlyexhibitsnoBearishTDPriceFlipseparatingtheTDSellSetupfromtheTDSellCountdown,thesignalisnot,therefore,aTDSequential9-13-9.01_Perl_ch01.indd428/08/57:26:11PM TDSequenTialThisdoesnotqualifyasavalidTDSequential9-13-9Sell8CountdownbecausetherewasaTDBuySetupbetween944.007910theTDSellCountdownandtheTDSellSetup.6451113343.0012127842.0061425133245441.0023678185699978140.007243439.001256338.0037.00Sep30Oct14Oct31Nov15Nov30Dec15Dec30Jan17Jan31Feb14Feb28Mar15Mar31Apr17Apr282005Figure1.32DisqualifiedTDSequential9-13-9SellSignalinthechartofTheHomeDepotu.S.A.,althoughthemarketcompletesaTDSellCountdown,there’saTDBuySetupbetweenthatandthesubsequentTDSellSetup,whichisaneventthatrenderstheTDSequential9-13-9Sellsignalinvalid.combiningtimeFramesforadditionalconfidenceApplyingtheapproachoutlinedabovetomultipletimeframescanincreasethesignal’sprobabilityofsuccess(Figures1.33,1.34,1.35).OnMarch,007,forexample,ataBloomberg“ThursdayNightTechnicals”session(typeonyourBloombergterminalforfurtherdetails),IhighlightedmyreasonsforbeingbearishontheUSDIndex.TheUSDIndex(DXY)alreadyhadanactivemonthlyTDSellSetupat91.7fromNovember00(Figure1.).Ataboutthesametime,inNovember00,themarketalsocompletedaweeklyTDSellSetup,at91.91(Figure1.).ThebeartrendwasreinforcedwhenDXYviolatedweeklyTDSTsupportat01_Perl_ch01.indd438/08/57:26:14PM DeMarkIndicatorsTDSellSetupat91.579MONTHLYinNovember200592.00058790.00046388.00086.0002184.000MonthlyTDSTsupportat81.2882.000Mar31May31Jul29Sep30Nov30Jan31Mar31May31Jul31Sep29Apr29Jun30Aug31Oct31Dec30Feb28Apr28Jun30Aug312005Figure1.33USDIndex(DXY,BasisCash),MonthlyChart:UsingMultipleTimeFramestoIdentifytheLong-TermTrendTheconfluenceofnegativeDXYsignalsisreinforcedinFebruary2007,whenaTDSequentialSellsignaloccursat85.12onthedailychart.interestingly,havingviolatedTDSTsupportinlateNovember2006,theensuingsellsignalmaterializesaheadofdailyTDSTresistance,indicatingthemarkethasinsufficientupwardmomentumforasuccessfulbreakoutoftherangetotheupside.(SeealsoFigures1.34and1.35.)7.7inApril00.Finally,onFebruary1,007,havingfailedtoovercomedailyTDSTresistanceat.,theDXYgeneratedadailyTDSequentialSellsignalat.1(Figure1.).Addingcredencetothebearishview,themarketsubsequentlyexperiencedadailyclosebelowdailyTDSTsupportat.,andpostedamonthlyclosebeneathmonthlyTDSTsupportat1..01_Perl_ch01.indd448/08/57:26:19PM TDSellSetupat91.91in9WEEKLYNovember2005892.00075463290.0001WeeklyTDSTsupportat87.7588.000ReinforceddowntrendafterbreakofTDSTsupport86.00084.000Sep30Oct28Nov25Dec30Jan27Feb24Mar31Apr28May262005Figure1.34USDIndex(DXY,BasisCash)WeeklyChart(SeealsoFigures1.33and1.35.)DAILY86.000DailyTDSTresistanceat85.4891085.5001113TDSequentialSell8112at85.12on85.00067February12,2007584.50023872394184.000361452483.50024356683.000757188DailyTDSTsupportat82.3882.5009Nov22Nov30Dec8Dec15Dec22Jan8Jan15Jan23Jan31Feb7Feb14Feb21Feb28Mar8Mar15Dec292006Figure1.35USDIndex(DXY,BasisCash)DailyChart(SeealsoFigures1.33and1.34.)01_Perl_ch01.indd458/08/57:26:26PM DeMarkIndicatorsFrequentlyaskedQuestionsabouttDSequentialIfmorepeoplestartusingTDSequential,willitsusefulnessdiminishovertime?Considerforamomentthattheindicatoriscountertrendbydefinition;therefore,itisalsocounterintuitiveformostpeoplewhoaretypicallytrendfollowers.Althoughit’struethatalotofpeoplearenowfamiliarwithTDSequentialandlookatitonaregularbasis,relativelyfewtradersareactuallywillingtocommitcapitaltoitorinitiatetradesbasedonit.Ifyougolongintoanuptrendandgetstoppedout,it’seasytorationalizetheposition.Itlookedasifitweregoingup,andsoyouboughtit,because“thetrendisyourfriend,”andotherpeopleprobablygotstoppedouttoo.Ontheotherhand,ifyougoshortintoanuptrendandgetstoppedout,it’shardertojustifyyouractions,particularlysinceitbecomesblatantlyapparentretrospectivelythatthemarketwasentrenchedinadirectionalupmove.Therewillbetimeswhentheindicatordoesn’tworkforprolongedperiods,butitisimportant,nevertheless,nottogiveuponit,andtoremainbothdisciplinedandobjective.Inthethirdquarterof00,IhadhadagoodrunwithTDSequentialforawhile,butthen,inthefourthquarter,Ihadaseriesoflosingtrades.Itwasatimewhenmanypeoplebecamedespondentandquestionedwhethertheindicatorstillworked.Well,onJanuary1,00,theindicatorgaveabuysignalinUSDJPYontheNewYorkclose.IshouldtellyouthatnotonlyhadIbeenexperiencingaparticularlybadrunoflosingrecommendations,butitalsohappenedtobeaFriday—andnotjustanyFriday,butaFridaybeforeathree-dayholidayweekendintheUnitedStates.Ifallthatwerenotenough,themarketclosedroughlytwenty-fivepipsoffafive-yearlow.Fromacustomerperspective,noneofthesefactorswasaningredientforahigh-confidencetrade.Ithinkonlyoneofourclientstradedthesignalthatday,andeventhatclientwasonlyclosingoutashortposition,notcommittingfreshcapitaltothelongside.Ioftenhighlightthisexamplewhendiscussingtheindicators—nottosay,withhindsight,howwonderfultheywere—buttoillustratehowtoughitistostickwiththemafterabadrun.Whenyou’vehada01_Perl_ch01.indd468/08/57:26:27PM TDSequenTial7prolongedlosingstreak,wheneveryonearoundyouiscallingthemarketlowerandquestioningthevalidityoftheapproach,andwhenmoreconventionaltechnicalanalysissuggeststheestablishedtrendisfirmlyintact,youcannotunderestimatehowdifficultitistotakealeapoffaithandtrade.Thinkbacktomydietingexampleintheintroductiontothisbook:Evenifyouknowtherulesyou’resupposedtofollow,whenemotionsareinvolved,it’sstillnoteasytostickwiththeplan.HowdidDeMarkcomeupwithnineandthirteenforTDSetupandTDCountdown?Aretheynecessarilytheoptimalnumberstouse?TomDeMarkhasneverreallygivenmeastraightanswertothefirstquestion—otherthantosaythathiswife,Nancy,wasincrediblypatientduringthetimehewasdevelopingtheindicators.Sincethestudywasdonethirtyyearsago,it’sreasonabletoaskwhethertherehavebeenanysubsequentoptimizationtests.I’mnotinclinedtooptimizethedefaultsettingsofnineforTDSetupandthirteenforTDCountdown.ThefactthatyoucanapplyTDSequentialtoanymarketortimeframe,irrespectiveofthemarket’sunderlyingvolatility,withoutyourhavingtochangeanyofthedefaultparameters,istestimonytohowrobustitis.Personally,Ipreferindicatorsthatworkwellacrosstheboard,ratherthanstudiesthatareoptimizedforaspecificmarketorsetofconditions;thelattertendtofailwhenthebehavioralcharacteristicsofthemarketchange.SinceDeMarkwasfascinatedbyFibonaccinumbers,hehadreallywantedtouseeightfortheTDSetupphase,andwasdisappointedthatalthoughnineworksbetter,it’snotaFibonaccinumber.Asmathematicians,designers,andarchitectsknow,theFibonaccinumbersareNature’snumberingsystem,andtheyarerepresentedintheleafarrangementofplants,thebractsofapinecone,andthescalesofapineapple.DeMarkwasrelieved—andabletosleepalotbetter—whensomeonepointedouttohimafewyearsbackthat,sinceTDSetupshaveafour-barlook-back,theTDSetupphasecoversthirteenbarsintotal!ShouldItradeeveryTDSetupnineandTDCountdownthirteenindiscriminately?It’scertainlytempting,but,sinceTDSequentialisnotaninfallibleindicator,therearetimeswhenthesignalsarelesslikelytowork.My01_Perl_ch01.indd478/08/57:26:27PM DeMarkIndicatorspersonalpreferenceistotradeacompletedTDSetuponlyifithasbeenperfectedandfailsonaclosetoexceedthepriorTDSetupintheoppositedirection.AsforTDCountdowns,ItrytoavoidcountertrendsignalsthatcoincidewithTDWave(seeChapter,“TDD-Wave,”fordetails),unlesstheprojectedpricetargethasalreadybeenreachedandthereisreinforcingevidenceofpriceexhaustionfromhigherdegreeTDSequentialtime-framecharts.IsTDSequentialbettersuitedtosomemarketsthanothers?Idon’tbelieveso;itseemsmoreofabehavioraldistinction;thatis,somemarketshaveagreatertendencytorangetrade,andthereforetogeneratemoreTDSetups,whileothershaveagreaterpropensitytotrend.ThemoredirectionalmarketsproducemoreTDCountdowns.IsTDSequentialbettersuitedtosometimeframesthanothers?No.Whiletheindicatorwasoriginallydevelopedwithdailypricedatainmind,youcanapplyittoanytimeframefromminutestoyears,regardlessofunderlyingvolatilityofthemarket,andwithoutyourhavingtochangeanyofthedefaultsettings.ThebreadthofitsapplicabilityistestimonytotherobustnessofTDSequential.Idobelieve,however,thatone’sexpectationsneedtobeadjustedrelativetotimeframe.Althoughhigh-frequencypricedatawillgeneratealotofsignalsandfairlytightrisklevels,theexpectedreturnpertradeisfairlylimited;whereas,ifyou’relookingatalonger-term-dataseries,you’llgetfewersignalsandgreaterpotentialprofitpertrade—butcommensuratelywiderrisklevels.HaveyoubacktestedtheperformanceofTDSequentialsignals?Ihavenotfelttheneedtobacktestthesignals,becauseI’vebeenusingtheindicatorsinrealtimeforthepastfourteenyears.Iwouldencouragethosenewtotheindicatorstodoso,togetabettersenseofwhenthesignalsdoanddonotwork.Inbacktesting,however,bearinmindthatyoumustobjectivelyfilterthesignalstogetconfirmationfromotherTDindicatorsand,ideally,timeframes,andit’suptoyoutomanagetheriskandthetake-profitlevel(sinceDeMarkdoesn’texplainhowtomanagethetradeonceitstartstomoveinyourfavor).Remember,TDSequentialisanindicator,notasystem.01_Perl_ch01.indd488/08/57:26:28PM TDSequenTial9■RiskManagementforTDSequentialThereareanumberofwaysinwhichyoucanimprovetheefficiencyofthesignalwithoutcompromisingthesignalitself:1.The“MaximumFavorableandAdverseExcursionsSubsequenttoaSignal”Method(thatis,thepointatwhichthemarketgoesmostinyourfavorandthepointatwhichittypicallygoesmostagainstyouwithoutbeingstoppedout).Thisisthemostobjectivewaytomanagetherisk.ifyouplotthedistributionofthesevariablesovertime,youcanatleastdetermineoptimumtake-profitlevels,whichisausefulexercisebecausethereisn’talwaysasignalintheoppositedirectiontotellyouwheretocloseoutaprofitabletrade.2.The“DrawdownSupport”Method.(ThisisthemethodofriskmanagementpopularizedbyDavidStendahlofrinaSystems,andisanotherconceptworthtesting.)ratherthantamperingwiththesignaltotrytooptimizeit(whichwouldcompromisetheintegrityofthesystem),youcantrytoplotthedistributionofsignalshistoricallygenerated.Thisideacanbeappliedtoanyapproach.ifyounotice,forexample,thatthemarketoftengoeshalfapercentagainstyoubeforebecomingprofitable,youcouldtradehalfyournormalunitsize,andthenaddtheremainder(totakeyouuptowhatwouldhavebeenyourfullinitialallocation)whenthemarketreachesthedrawdownsupportlevel.Thisway,youremaintruetotheentrysignal,withouttryingtooptimizeit,andyouremaintruetotheriskparameters,butyouaverageyourentryprice.Theneteffect,overtime,shouldimproveyouroverallperformance.I’venoticed,tomycost,that,whenmarketsaretrending,mostTDCountdownthirteensgetstoppedout.IsthereanythingIcandotoreducethisriskandimprovethesuccessrateofthesignalsbynottryingtofadetrendswhenmomentumbehindthemoveisverystrong?Here,insteadofusingTDSequentialinisolation,I’dsuggestusingtheindicatoronamultiple-time-framebasis,toseeifhigher-degreetimeframesareinsyncwithotherindicators,suchasTDComboandTDD-Wave.TDD-Wave,inparticular,ishelpful,becauseitputsthebroadertrendintocontext,andI’veobserved,overtheyears,thatcountertrendTDSequentialsignalsoccurringinTDD-Wavethreearemorelikelytoviolatetheirrisklevelsthanthosethat,forexample,coincidewithTDD-Wavefive.Howimportantiscontext?Justasit’ssoundfromanecologicalperspectivetoconsidertheenviron-mentyoulivein,it’ssoundfromatrendperspectivetoconsiderthemarketenvironmentyouoperatein.Forme,althoughweekly,monthly,01_Perl_ch01.indd498/08/57:26:28PM 0DeMarkIndicatorsquarterly,andannualsignalsareimportant(particularlywhentheylineupwithdailycharts),thesignalsstemmingfromthedailiesarethemostimportant,particularlyifyoutradeintraday.Youwillimproveyourchancesofsuccessif,forexample,youtakeonlybuysignalsintraday(completedthirteensorninesthatholdTDSTsupport),ratherthansellsignals,ifthedailycharthasanactivequalifiedbuysignalinplace.ShouldItradeTDCountdownthirteensusingshort-datedoptionsratherthantheunderlyingcashorfuturesinstrumentIgetthesignalin?Itdependsonthecircumstances.Oftenpeoplethinkanoptionisabetterwaytoexpressacountertrendview,becausetheybelievethere’salowerprobabilitythattherisklevelwillbeviolatedbeforetheexpectedreversalmaterializes.Thatmaybeso,butit’salsoimportanttoconsiderthetime-decayelementandtheimpliedvolatilityoftheoptioninquestion.I’minclinedtoexpressacountertrendviewonlyfollowingacompletedTDSequentialviaanoptionifimpliedvolatilityisverylow.Otherwise,whenyou’rewrong,yougethitfromaprice,time,andvolatility-decayperspective,ifthetrendcontinuesmoregraduallyorifthemarketmerelyconsolidates.Ifwe’realreadyonbartwelveofaprospectivethirteen,whyshouldn’tIpreemptthesignalifIthinkareversalisimminent?Let’ssaythemarketisonbartwelveofaprospectiveTDBuyCountdownthirteen.Theonlythingthatwouldpreventtheappearanceofathirteenwouldbeiftherewereamarketrally—theeventyouwereultimatelywaitingfor.Since,however,themarketwouldneedtocloselessthan,orequalto,thelowtwopricebarsearliertocompletethesignal,itwouldnotbeadvisabletopreemptthesignalbecause:•There’sariskofnewlows,and•Thetruerangeofthelowestlowisusedtocalculatetherisklevel(whichmeansthat,ifyouactaheadoftime,youcouldquiteeasilyhavethewrongstop-loss).SometimesarandomTDCountdownnumberseemstoappearfromnowhere—isthisabuginthesoftware?No.What’sgoingonhereisthat,sincechartingsystemsareprogrammednottodisplaymorethanonedevelopingTDCountdownatanygiven01_Perl_ch01.indd508/08/57:26:29PM TDSequenTial11.3000TheTDSellCountdownbar5appearsafter1211thepriorTDSellCountdowncompletes.109139688767541351231.2500912810117896755634341213126781.2000119121012345945898327234567161.150011.1000Sep22Sep30Oct8Oct15Oct23Oct31Nov7Nov14Nov21Nov28Dec8Dec15Dec23Dec31Jan8Jan152003Figure1.36ATDBuyCountdownNumber“AppearingfromNowhere”inthechartofeuruSD,aseeminglyrandomTDBuyCountdownnumber5appears“fromnowhere,”onDecember18,2003.Thisisn’tabug;it’spartoftheTDBuyCountdownresultingfromtheTDBuySetupthatfinishesonDecember10,2003,buttheBloombergchartingsystemdoesn’tdisplaythatCountdownuntilthepriorCountdowncompletes.moment,thedefaultisalwaystoshowtheTDCountdownclosesttocompletion(Figure1.36).If,forexample,therearetwoTDCountdownsinprogress,thesecond,hidden,TDCountdownwillcontinuecountinginthebackground,butbedisplayedonlywhenthefirstTDCountdownfinishes(hencemakingitappearthatTDCountdownnumberssometimesappear“fromnowhere,”midcount).SometimesTDSetupsandTDCountdownsdisappear—isthisabuginthesoftware?No.Whenmarket-datasystemsupdateinrealtime,theytreatthecurrentpriceastheclose,whichiswhyasignalthathappenstosatisfytherequisitecriteriaonanintrabarbasismayappearonareal-timebasispriortothecompletionofapricebar.Thenumbersarenotfixeduntiltheendofthechosenperiod,however,andsotheywilldisappearifthe01_Perl_ch01.indd518/08/57:26:32PM DeMarkIndicatorsnecessaryconditionsarenotsatisfiedatthecloseoftheperiodselected.BeawarethatTDSetupsarecontinuallyforming,regardlessofwhereweareintheTDCountdownphase.CanIapplyTDSequentialtoanyprice-dataseries?Yes,youcan,withtheprovisothatthedataneedstobeclean,thatis,freeofanyunintentionalpricegapsormissingdatapoints.Infact,we’vehadsuccessapplyingtheindicatornotonlytoprice,butalsototickcharts(whichaggregatethenumberofpriceupdatestoalloweachbartorepresentanequalnumberofpriceupdates),toconstant-volumebars(whichaggregatevolumedatatoalloweachbartorepresentanequalvolume),tospreads,tobondyields,toimpliedvolatility,toeconomicdataseries,andeventoproprietarydataliketheUBSFXRiskIndex(Figures1.37,1.38,1.39,and1.40).CanIapplyTDSequentialtoothertechnicalindicators?Yes,it’sworthexperimentingwiththisidea,butyouneedtobeawarethat,bydoingso,you’relookingataderivativeofprice.MypreferenceCompletedTDSequentialSellCountdown135.300115.200121015.100253894691315.000674378226155234454.900967878967104.800R534821194.70011213234.600May15May22May31Jun8Jun15Jun22Jun29Jul9Jul16Jul23Jul31Aug8Figure1.37DailyChartofTDSequentialOverlaidonU.S.10-YearCashYields01_Perl_ch01.indd528/08/57:26:35PM 46.40001236.20006.000015.8000245.60005891376235.4000456789105.200011125.000013CompletedTDSequentialBuyCountdown4.8000…Apr20Apr30May8May15May23May31Jun8Jun15Jun22Jun29Jul9Jul16Jul23Jul31…Figure1.38DailyChartofTDSequentialOverlaidonEURUSD3-MonthImpliedVolatility17.0016.0015.0067814.00915413.003345261212.00279142348738111.00569525613717386812491011911131210.0010CompletedTDSequentialCompletedTDSequentialBuyCountdownBuyCountdown9.00Jun15Jun30Jul15Jul29Aug15Aug31Sep15Sep30Oct14Oct31Nov15Nov30Dec15Dec30Jan172005Figure1.39DailyChartofTDSequentialOverlaidontheCBOES&P500VIX(VolatilityIndex)01_Perl_ch01.indd538/08/57:26:40PM DeMarkIndicators3.400133.200CompletedTDSequentialCompletedTDSequentialSellCountdown312SellCountdown2.80011910132.6178*2.400897111122.200105224631.800561.73034791.6001268911.4001.200831734520.80020.60010.400SepOctNovDec0.200613202703101724010815222901051219260310Figure1.40ApplyingTDSequentialtotheUBSFXRiskIndexThisdailyindexchartshowshowTDSequentialissuccessfullyappliedtotheuBSFXriskindex.Theindexshowsinvestorappetiteforrisk.Thechartshowsthatwhentheindexisrising,themarketisincreasinglyriskaverse;whentheindexisfalling,thechartreflectsagrowingappetiteforrisk.ifyouapplyTDSequentialtotheindex,ashasbeendoneinthepast,it’sanextremelyusefultooltohelpyouidentifyprospectiveturnsinriskappetiteoraversion.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.DatafromuBSAg.isalwaystoevaluatepriceactionfirst.Nevertheless,itispossibletooverlayTDSequentialonmomentumindicatorsliketheRSI,anditalsoworksquitewellonpoint&figurecharts.Interestingly,youcanoverlayTDSequentialevenonopeninterest,andI’dalsorecommendexperimentingwithapplyingFibonacciretracementstoTDSetups(Figures1.41,1.42,1.43,1.44,and1.45).Remember,whileTDSetupsareonlydisplayedupuntilthecloseofbarnine,itisworthlookingatboththeretracementsoftheone-tonine-rangeextremesandthecompletedTDSetupbeyondnine(thelastonlyuntilaTDPriceFlipoccurs).ThisrangecanbehighlightedifyouchecktheTDSetupshadingboxinTDSetupparameters.01_Perl_ch01.indd548/08/57:26:46PM 115000114500711400056898911350034711300045611250023112000111500218911110005671105003411000010950021090001108500108000107500107000106500106000105500RSI89101112678923456716045123123CompletedTDSequential4045678912371011BuyCountdown34.48456891228.82JulAug13Sep2021280106121926020916233001071220Figure1.41UsingTDSequentialwithOverboughtorOversoldOscillatorsThedailychartoftheS&P500(basiscash)showshowyoucanoverlayTDSequentialonoverboughtoroversoldoscillatorssuchastherSi,toidentifyprospectiveturnsinmomentum.Notehow,inthisexample,ifyourelyonpricealone,youwillhavenopricesignalatthelow.ifyouapplyTDSequentialtothecorrespondingrSi,however,youwillhaveevidencethatmomentum(andthereforeprice)issusceptibletoareversalhigherinAugust2004.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.1163035791113116001968101224576811150034Completed12TDSequential311400SellCountdown251130047161923811200325591344678211100610795841191100010995612810111910900813CompletedTDSequential10800BuyCountdown107406-06:5510-15:0914-07:5418-00:1921-08:1827-08:3031-14:134-06:308-18:5615-08:0316-19:38Figure1.42UsingTDSequentialwithPoint&FigureChartsThedailychartofuSDCHFshowshowyoucanoverlayTDSequentialonapoint&figurecharttoidentifyprospectiveturnsinprice.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.01_Perl_ch01.indd558/08/57:27:10PM 12138950101113CompletedTDSequential689138900SellCountdown75138850113880034341387502251941387002835138650R71386006611385509571385002138450567834138400184913835023113830013825016-20:0816-20:1016-20:1216-20:1416-20:1616-20:1816-20:2016-20:2216-20:2416-20:2616-20:28Figure1.43UsingTDSequentialwithTickChartsThedailychartoftheS&P500(basiscash)showshowyoucanoverlayTDSequentialontickchartstoidentifyprospectiveturnsinprice.Tickchartsaggregatethenumberofpriceupdatessuchthateachbarrepresentsanequalnumberofpriceupdates.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.147800CompletedTDSequential31113SellCountdown2414760010123671474009818495382147200571479147000267314680016518314660043941014640021155612214620019361314600048114580072CompletedTDSequentialBuyCountdown14560014540018-20:4119-15:0319-16:2419-17:5419-19:3720-14:3020-15:3120-17:1820-19:47Figure1.44UsingTDSequentialwithConstantVolumeBarsThedailychartoftheS&P500(basiscash)showshowyoucanoverlayTDSequentialonConstant-Volumebarstoidentifyprospectiveturnsinprice.Constantvolumebarsaggregatevolumedatasothateachbarrepresentsthesameamountofvolume.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.01_Perl_ch01.indd568/08/57:27:57PM TDSequenTial790008873880086008400820080007800760001111210625000CompletedTDSequentialSell45132359875611Countdownforopeninterest15939538910137895750007912565500005645678912343237852500019241123456500000CompletedTDSequentialSell123459475000678Countdownforopeninterest450000NovDec200815222901051219260310172402071421Figure1.45UsingTDSequentialtoIdentifyTurnsinOpenInterestThedailychartofCOMeXgoldshowshowyoucanuseTDSequentialeventoidentifyprospectiveturnsinopeninterest.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.tDSequential:recommendedSettings01_Perl_ch01.indd578/08/57:28:04PM DeMarkIndicatorstDaggressiveSequentialTherewillinevitablybetimeswhenTDSequentialissilent.Forthosewhowanttotrademorefrequently,TDAggressiveSequentialcanbeausefuladjuncttoitsmoreconservativepartner.ItisverysimilartoTDSequential,inthesensethattheconditionsrequiredtocompletetheTDSetupphasearethesame;it’sjusttheTDCountdownphasethatdiffers.■TDAggressiveSequentialForaprospectivesellfollowingacompletedTDSellSetup:TDAggressiveSequentialcomparesthehighwiththehightwopricebarsearlier,duringtheTDSellCountdownprocess.ForaprospectivebuyfollowingacompletedTDBuySetup:TDAggressiveSequentialcomparesthelowwiththelowtwopricebarsearlierduringtheTDBuyCountdownphase.Bydefinition,TDAggressiveSequentialalwaysproducesbuyandsellsignalsbeforeTDSequentialdoes.IhavefoundthatoftenTDAggressiveSequentialidentifiesthetrendextreme,whileTDSequentialcapturestheretestofthatpriceextreme.Itisgenerallysafertoactwhenbothindicatorsproducesignalsatthesametime.Thatsaid,TDAggressiveSequentialisusefulwhenmarketsreachpriceprojections,andtherelativepositioningoftheTDstudiessuggestsareversalislikely,eventhoughTDSequentialissilent.01_Perl_ch01.indd588/08/57:28:05PM chapter2TDComboLikeitscounterpart,TDSequential,TDCombotriestoanticipatepriceexhaustionwithinatrend.Because,bydefinition,ittakesaminimumoftwenty-twopricebarstogenerateaTDSequentialsignal,itisusefultohaveanothertooltoidentifyprospectiveturningpointsfollowinganabruptpricemovement.AlthoughthecriterianecessarytogenerateaTDCombobuyorsellsignalaremorestringentthanthosetocompleteaTDSequentialBuyorSellCountdown,TDComboisbetterequippedtorespondtosharpdirectionalmoves,sinceitrequiresaminimumofonlythirteenpricebarsfromstarttofinish.Ideally,aconfluenceofTDSequentialandTDCombosignalswillimprovethechanceofasuccessfultrade.AswithTDAggressiveSequential,however,therearetimeswhenTDCombospeaksandTDSequentialissilent.Insuchinstances,IprefertohavereinforcingevidenceofpotentialpriceexhaustionfromotherTDindicators/timeframesratherthantorelyonthesignalinisolation.DeMarksuggeststhat,forintradaycharts,TDCombohasaslightedgeoverTDSequential.Note:TherearetwoversionsofTDCombo,onemoreconservativethantheother.tDcomboBuySetupThecriteriaforaTDBuySetupwithinTDComboareidenticaltothoserequiredforaTDBuySetupwithinTDSequential,andforRecycle:5902_Perl_ch02.indd598/08/57:29:22PM 60DeMarkIndicators■RequirementsforaTDComboBuySetupFirst,weneedtoseeaBearishTDPriceFlip,thatis,acloseabovetheclosefourpricebarsearlierimmediatelyfollowedbyaclosebeneaththeclosefourpricebarsearlier.Then,tocompleteaTDBuySetup,startingfromandinclusiveoftheBearishTDPriceFlipbar,weneedanuninterruptedseriesofninecloses,eachonelowerthantheclosefourpricebarsearlier.DifferencesinBuycountdown:tDcombovs.tDSequentialOncetheTDComboBuySetupiscomplete,thedifferencesbetweenTDComboandTDSequentialbecomeapparent:•TDSequentialwaitsforthecompletionofaTDBuySetupandthenbeginslookingfortheconditionsnecessarytosatisfytherequirementsforaTDBuyCountdown,but•TDCombowaitsforaTDBuySetuptofinish,andthenbeginstheTDBuyCountdown,frombaroneoftheprecedingTDBuySetuponward.tDcomboBuycountdownCommencingfrombaroneofthepriorqualifyingTDBuySetup,theTDBuyCountdownphaseofTDCombobeginsretrospectively(Figure2.1).UnlikeTDSequential,however,whichsimplystatesthateachclosemustbelessthanthecorrespondinglowtwopricebarsearlier,aTDComboBuyrequiresfourconditionstobesatisfiedsimultaneously.Therearetwoversions,onelessstrictthantheother.■RequirementsforaTDComboBuyCountdownVersionI(StrictVersion)1.Theclosemustbelessthan,orequalto,thelowtwopricebarsearlier;2.EachTDComboBuyCountdownlowmustbelessthan,orequalto,thelowofthepriorpricebar;3.EachTDComboBuyCountdownclosemustbelessthanthepreviousTDComboBuyCountdownclose;and4.EachTDComboBuyCountdownclosemustbelessthanthecloseofthepriorpricebar.02_Perl_ch02.indd608/08/57:29:23PM TDCombo6111.200011.1000CompletedTDBuySetup11.00001123425610.9000379458678910.800010111210.7000CompletedTDComboBuyCountdown1310.6000Sep14Sep21Sep28Oct8Oct15Oct23Oct31Nov8Nov15Nov22FIgurE2.1CompleteTDComboBuyCountdownVersionIInthechartofuSDMXN,subsequenttothecompletionofTDBuySetup,wegobacktobaroneandbeginlookingfortheTDComboBuyCountdownconditionsfromthereonward.■RequirementsforaTDComboBuyCountdownVersionII(Less-StrictVersion)ThefirstfourrequirementsarethesameasforVersionI:1.Theclosemustbelessthan,orequalto,thelowtwopricebarsearlier,uptoandincludingbartenoftheTDBuyCountdownphase;2.EachTDComboBuyCountdownlowmustbelessthan,orequalto,thelowofthepriorpricebar;3.EachTDComboBuyCountdownclosemustbelessthanthepreviousTDComboBuyCountdownclose;and4.EachTDComboBuyCountdownclosemustbelessthanthecloseofthepriorpricebar.However,forTDComboBuyCountdownbarseleven,twelve,andthirteenonly,5.Theclosesneedonlybesuccessivelylower,anditisnotnecessarytoapplythemore-stringentconditionslistedearlier.02_Perl_ch02.indd618/08/57:29:27PM 62DeMarkIndicators■ToEnteraLongPosition1.WaitforasuccessfullycompletedTDComboBuyCountdown,and2.Establishalongpositiononthecloseofbarthirteen.■RiskManagement:ForEnteringaTDComboBuyCountdownLongPosition1.LookforthebarthathasthelowesttruelowwithintheTDComboBuyCountdownprocess(everybarfromonetothirteeninclusive,regardlessofwhetheritisanumberedbar),and2.Subtractthetruerangeofthatbarfromitstruelow(Figure2.2).AstheymightwithaTDSequentialBuysignal,moreconservativetraders,beforeenteringatrade,canwaitforthefirstpricebarthathasaclosegreaterthantheclosefourbarsearlier,thatis,abullishTDPriceFlip.ThiseliminatestheriskofRecycling.SimilartotheresponsetoTDSequential,ameaningfulresponsecanbeexpectedwithintwelvepricebarsfollowingtheTDComboBuysignal—ideallyabullishTDPriceFlipand/oramovebeyondtheTDReferenceClose(thatis,abreakofthehighesthighfourbarspriortothelow).RatherthaninitiatingalongpositiononthecloseofTDComboBuyCountdownbarthirteen(myownpersonalpreference),moreconservativetradersmaypreferwaitingforconfirmationofareversalfromoneofthefollowingconfigurations:TDCamouflage,TDClop,TDClopwin,TDOpen,orTDTrap.TherequirementsforaTDSellSetupwithinTDComboarethesameasthoseforaTDSellSetupwithinTDSequential.■RequirementsforaTDComboSellSetupVersionI1.ABullishTDPriceFlip(thatis,aclosebeneaththeclosefourpricebarsearlier,immediatelyfollowedbyacloseabovetheclosefourpricebarsearlier),and2.Anuninterruptedseriesofninecloses,eachoneabovetheclosefourpricebarsearlier(startingfromandinclusiveoftheBullishTDPriceFlipbar).02_Perl_ch02.indd628/08/57:29:28PM TDCombo637.1000127.000012TDBuyCombobar13hasthelowesttruelow,sotherisklevelinthisinstanceisderivedfromthetruerangeofTDBuyCombobar136.900034subtractedfromthetruelowofTDBuyCombobar13.34785697566.800089106.70001112136.6000Jun15Jun22Jun29Jul9Jul16Jul23Jul31Aug8Aug15FIgurE2.2CalculatingtheRiskLevelFollowingaTDComboVersionIBuySignalInthedailychartofuSDSEK,alookatTDCountdownbarsonetothirteeninclusive—includingallbars,eventhosethataren’tnumbered—showsthatTDCombobarthirteenhasthelowesttruelow.TocalculatetheTDrisklevel,wethereforetakethetruerangeofthatbarandsubtractthatvaluefromitstruelow.■DifferencesinSellCountdown:TDCombovs.TDSequentialTDComboSellCountdownOncetheTDComboSellSetupiscomplete,thedifferencesbetweenTDComboandTDSequentialmanifestthemselves:TDSequentialwaitsfortheterminationofaTDSellSetupandthenbeginslookingfortheconditionsnecessarytosatisfytherequirementsforaTDSellCountdown,ButTDCombowaitsforaTDSellSetuptocomplete,andthenbeginstheTDSellCountdown(frombaroneoftheprecedingTDSellSetuponward).CommencingfrombaroneofthepriorqualifyingTDSellSetup,theTDSellCountdownphaseofTDCombobeginsretrospectively(Figure2.3).UnlikeTDSequential,however,whichsimplyrequires02_Perl_ch02.indd638/08/57:29:32PM 64DeMarkIndicators1.1000CompletedTDComboSellCountdown13121.08001191081.0600CompletedTD123475SellSetup15621.04004896373245612371.0200141.00008950.98001317181920242526271234591011121617181922242526293012567912139/149/219/2810/810/1510/2310/3111/8FIgurE2.3CompleteTDComboSellCountdownVersionIInthedailychartofAuDCHF,subsequenttothecompletionoftheTDSellSetup,wegobacktobaroneandbeginlookingfortheTDComboSellCountdownconditionsfromthereonward.thateachclosebegreaterthanthecorrespondinghightwopricebarsearlier,aTDComboSellrequiresthatfourconditionsbesatisfiedsimultaneously.■RequirementsforaTDComboSellCountdownVersionI(MoreStrict)Thefollowingconditionsmustbesatisfiedsimultaneously:1.Theclosemustbegreaterthan,orequalto,thehightwopricebarsearlier;2.EachTDComboSellCountdownhighmustbegreaterthan,orequalto,thehighofthepreviouspricebar;3.EachTDComboSellCountdownclosemustbegreaterthanthecloseofthepreviousTDComboSellCountdownclose;and4.EachTDComboSellCountdownclosemustbegreaterthanthecloseofthepreviouspricebar.02_Perl_ch02.indd648/08/57:29:34PM TDCombo65TDComboSellCountdownVersionIIisverysimilartoVersionI,butlessstrict.■RequirementsforaTDComboSellCountdownVersionII(LessStrict)ForVersionII,asindicatedbelow,thefirstfourrequirementsarethesameasforVersionI,forTDComboSellCountdownbarsonetoteninclusive:1.Theclosemustbegreaterthan,orequalto,thehightwopricebarsearlier;2.EachTDComboSellCountdownhighmustbegreaterthan,orequalto,thehighofthepreviouspricebar;3.EachTDComboSellCountdownclosemustbegreaterthanthecloseofthepreviousTDComboSellCountdown;and4.EachTDComboSellCountdownclosemustbegreaterthanthecloseofthepreviouspricebar.However,TDComboSellCountdownbarseleven,twelve,andthirteenonlyneedtobesuccessivelyhigher,andit’snotnecessarytoapplythemore-stringentconditionslistedabove.■RiskManagement:CalculatingtheRiskLevelofaShortPositionFollowingaTDComboSellCountdownFollowingasuccessfullycompletedTDComboSellCountdown,therisklevelforashortpositionmaybecalculated,andthetradeestablished,onthecloseofbarthirteen:1.IdentifythebarthathasthehighesttruehighwithintheTDComboSellCountdownprocess(everybarfromonetothirteeninclusive,aswellasthosethataren’tnumbered),and2.Addthetruerangeofthatbartoitstruehigh(Figure2.4).AstheymightwithaTDSequentialSellsignal,moreconservativetraderscanwaitforthefirstpricebarthathasacloselessthantheclosefourbarsearlier,thatis,abearishTDPriceFlip,beforeenteringatrade.ThiseliminatestheriskofRecycling.AsyoumightwithTDSequential,youshouldexpectameaningfulresponsewithintwelvepricebarsfollowingtheTDComboSellsignal,ideallyabearishTDPriceFlipand/oramovebeyondtheTDReferenceClose,thatis,abreakofthelowestlowfourbarsprevioustothehigh.02_Perl_ch02.indd658/08/57:29:35PM 66DeMarkIndicatorsTDSellCombobar13hasthehighesttruehigh,sotherisklevelinthisinstanceisderivedfromthetruerangeofTDSell100Combobar13addedtothetruehighofTDSellCombobar13.1312119107895965348729016589467585231342801759101112161718192324252629301256791213141619202126272829345610/1510/2210/3111/811/1511/2311/3012/7FIgurE2.4CalculatingtheRiskLevelFollowingaTDComboVersionISellSignalInthedailychartofNymexcrudeoil(WTI),TDCountdownbarsonetothirteeninclusive(includingallbarswhethernumberedornot),TDCountdownbarthirteenhasthehighesttruehigh.TocalculatetheTDrisklevel,wethereforetakethetruerangeofthatbarandaddthatvaluetoitstruehigh.RatherthaninitiatingashortpositiononthecloseofTDComboSellCountdownbarthirteen,more-conservativetradersmayalsowanttowaitforconfirmationofareversalafterconfirmationfromTDCamouflage,TDClop,TDClopwin,TDOpen,orTDTrap.tDcomboVersionI:recommendedSettings02_Perl_ch02.indd668/08/57:29:39PM TDCombo6702_Perl_ch02.indd678/08/57:29:40PM 02_Perl_ch02.indd688/08/57:29:40PM chapter3TDD-Wave“Wherearewegoing,andwhenwillwegetthere?”impatientchildrenasktheirparentsduringalongjourney;tradersoftenaskmethesamequestionaboutpriceaction,whenthey’relookingforinsightintomarketdirectionandtiming.IfindthatElliottwavetheoryaddressesthisquestion,andIamfortunateenoughtoworkwithsomeextremelygood“Elliotticians.”Nevertheless,whiletheElliottwavetheoryappealstome,Igetfrustratedbythesubjectivemannerinwhichmanypeopleseemtoapplyit.Aswithpolitics,everyonehasanopinionandapreferredElliottwavecount,buttheopinionsandcountsaren’talwaysobjectiveorevenrational,andareinvariablydictatedbypreferreddirectionalbiases.Fortunately,DeMarkoffersasolutiontothisproblem.HesawmeritintheWaveprinciple,buthedecidedtocreaterules,whichhecallsTDD-Wave,toinsureobjectivityinElliottwaveapplicationandinterpretation.Unfortunately,DeMarkdidn’tprovideadetailedexplanationofTDD-Wave.Infact,inhisfirstbook,TheNewScienceofTechnicalAnalysis,hedevotedjustafewpagestoit,andheneverreferredtoitagaininanyofhissubsequentbooks.Asaresult,IfieldmorequestionsaboutthisparticularstudythananyotherTDindicator,withthepossibleexceptionofTDSequential.I’velosttrackofthenumberoftimessomeonehassaidtome,“Idon’tsupposeyou’vewrittenanythingonthesubject?”Andso,intheinterestsofTDD-Waveglasnost,Iwillnowgiveamorethoroughexplanation.6903_Perl_ch03.indd698/08/57:35:18PM 70DeMarkIndicatorstheUnderlyingelliottWaveprincipleNodiscussiononTDD-WavewouldbecompletewithoutfirstreviewingElliottwavetheory.Solet’stakealookattheunderlyingwaveprincipleandthenseehowDeMarkmodifiedittoremovethemoresubjectiveelements.RalphNelsonElliott,inspiredbythewritingsofCharlesDow,developedhisElliottwavetheoryinthe1930s.ThedifferencebetweenhistheoryandDow’scanbesummeduplikethis:•Dowclassifiedbullandbeartrendsintermsofaccumulationanddistributionphasesbetweeninstitutionalandretailinvestors,but•Elliottdescribedmarketsintermsofthreeimpulsivedirectionalpricemovements(waves1,3,and5),coupledwithtwoseparatenonimpulsivecountertrendcorrectivemoves(waves2and4).TheElliottwave’sensuingreversalunfoldsinasequenceofthreewaves,twoofwhich(wavesAandC)areagainstwhathadbeenthedominanttrendupuntilthatpoint,andoneofwhich(waveB)isinthedirectionoftheprevioustrend.Todiscernatrend,DowTheorydependsheavilyontherelationshipbetweenpreviouspricepeaksandtroughs(anuptrendisdefinedasaseriesofhigherhighsandhigherlows,andadowntrendasaseriesoflowerhighsandlowerlows).Thisapproachisdefinitive,butitdoesn’tprovideagreatdealofinsightintothetimingofprospectiveturningpoints,sinceatrendreversalbecomesapparentonlyafterthefact.Elliottwave,ontheotherhand,ismoreforwardlookingand,ifusedcorrectly,cansignificantlyimproveyourchancesofidentifyingpricereversalsbeforetheyhappen.AswithTDSequential,bothElliottwaveandTDD-Waveareappealingbecauseyoucanapplythemtoanymarketortimeframe,regardlessoftheunderlyingvolatilityoftheinstrumentinquestion,andwithoutyourneedingtochangeanyofthedefaultindicatorsettings.Ifusedproperly,bothElliottwaveandTDD-Wavecanpro-videaroadmaptothedirectionofthemarketthatyoucanusetodeterminepriceobjectivesandisolateprospectivetrend-exhaustionpoints.03_Perl_ch03.indd708/08/57:35:19PM TDD-Wave71elliottWaveBasicsFamiliarizingyourselfwiththebehavioralcharacteristicsofeachwavewillgiveyouabettersenseofwherepriceactionis,relativetotheunderlyingtrendatanygivenpoint.Let’slookatthedifferentstagesofanuptrend(whichcansimplybereversedforadowntrend):•Wave1developsatatimewhenmarketsentimentisoverwhelminglybearish.DowTheoristswouldclassifythisstageofthetrendastheaccumulationphase.Participationinthisinitialrallyislimited,sinceeconomicnewsremainsnegativeandinvestorsarestillinclinedtosellrallies.Atthispoint,“clued-up”institutionalinvestors,actingonthepremisethatatentativebasingprocessisunderway,tendtobethelonebullsandsolesourceofbuyingactivity.Evidencethatabroaderbasingprocessisdevelopingmanifestsitselfintheformofa)athreateningbullishdivergencebetweenpriceactionandmomentum,b)apricethatisholdingimportanttrendlineorFibonaccisupports,c)extremesentimentreadings,andd)decliningopeninterestinthefinalstagesofthepriordecline.•Wave2invariablyretracesalargepartofwave1’sgains—atleast61.8percent—but,crucially,cannottradebelowthelowofwave1,wheretheoriginalrecoverybegan.Duringthispullbackphase,bearstrytoreassertthemselves,successfullywrestlingintosubmissionallbutthestrongestofbullswiththemostconviction.•Wave3isElliottwaveutopia,sinceitisthemostpowerfulandimpulsivestageoftheadvance(Figure3.2).Openinterest,volume,andpriceactionshouldallpickupdramaticallyinthedirectionofthedevelopinguptrend.Moreoftenthannot,thisphasestartsgradually,asbullstrytogathermomentumaheadofwave1’speak.Atthispoint,confidenceinanupsideresolutionisrelativelylow,reflectinglimitedfaithinthebulls’chancesofsuccessfullyovercomingthehighofwave1.Sentimentshiftsinfavoroftheupside,however,whenwave1’speakiseventuallyviolatedandshort-covering,trend-followerinvolvementandinstitutionalactivityfuelfreshbuyinginterest.•Wave4isthetoughesttimetotrade,sincepriceactionduringthisphasetendstobevolatile.Themarkettypicallyretraces38.2percentofwave3’sgains,butcangiveback61.8percentormore,ifwave2wasveryshallow.Tradingduringthisphasecanbeextremelyfrustrating,03_Perl_ch03.indd718/08/57:35:19PM 72DeMarkIndicatorsDistributionphaseTrendphase—Havingheldthepriorlow,themarketpostsahigherhighrelativeDownwardcorrectiontothepreviouspeak.holdspriorlow.AccumulationphaseDownwardcorrectionholdspriorlow.Figure3.1DowTheoryUptrendDevelopmentWave5WaveBWave3WaveAWaveCWave4Wave1Wave2Figure3.2ElliottWaveUptrendDevelopmentsinceprofitsonnewlyestablishedtradescanevaporatequicklyandoftenturnintolosses.Ideally,pricesshouldn’tdipbackbelowthepriorwave-1high,butthelowofwave2isthe“lineinthesand,”sinceweaknessbeyondthatpointwouldinvalidatethebullishwavecount.•Wave5correspondstothestageofthetrendthatDowTheoristswouldrecognizeasfullparticipationbythegeneralpublic.Themarketcontinuestotradehigher,andactuallygoesbeyondthepriorwave-3peak(Figure3.1).However,institutionalbuyinginterest03_Perl_ch03.indd728/08/57:35:27PM TDD-Wave73dissipatesinthelatterstagesofwave5,asprofessionalinvestors,recognizingthatfreshlongpositionsfromcurrentlevelsorhigherarenolongerfavorablefromarisk/rewardperspective,becomemoredefensive,andstarttakingprotectivemeasuresinanticipationofatrendreversal.Earlysignsofaprospectivetopmanifestthemselvesintheformofthreatening(oftenpronounced),bearishdivergencebetweenpriceactionandmomentum.•WaveAiswhatDowTheoristswouldrefertoasthe“distributionphase.”Economicnewsremainsgenerallysupportiveofthebroaderuptrend,andsentimentindicatorsmaintainabullishbias,totheextentthattheinvestingpublicviewsthesetbackasahealthycorrectionrelativetowhatisstillperceivedasastronguptrend.•WaveBisalsoadifficulttimetotrade,astheattemptedrallyfromthelowofwaveAfailstoovercomethepriorwave-5peak.•WaveCsharessimilarbehavioralcharacteristicswithwave3.Moreoftenthannot,thismovelowerisimpulsive—breakingdownintofiveWavestructures—anditslengthwilltendtobe1.618timesthatofwaveA.SentimentshiftsfrombullishtobearishwhenthemarketviolatesthepriorwaveAlowandbeginstoformaseriesoflowerhighsandlowerlows.ThesebasicaspectsofElliottwavemakealotofsensetome.Whatistroubling,however,isthatmostElliotticiansdon’tincorporatetimeintotheiranalysis.Furthermore,whileIhavethegoodfortunetoworkwithsomeofthemostskilledandhighlyregardedElliotticiansinthebusiness,whodoanexcellentjobofinterpretingthecurrentwavecountforme,I’vealwayshaddifficultyfiguringoutadefinitiveElliottwavecountonmyown.IparticularlystrugglewhenI’mtryingtodeterminewhetherthemarketisinwave3orwaveCor,attimes,whenwave5extends.DeMarkaddressedthetimingissuebyintroducingasetofdefinitiveconditionsthatneedtobesatisfiedinordertoqualifyeachTDD-Wave—his“mechanized”versionofElliottwave.DeMark’sMechanizedVersionofelliottWaveWhenapplyingTDD-Wave,theuserhastheoptiontoselectthehigh,low,orcloseforareferenceprice.DeMarkoriginallyrecommendedthehighandlow,butIpreferusingthecloseinstead,since,03_Perl_ch03.indd738/08/57:35:28PM 74DeMarkIndicatorsforthepurposesoftheTDD-Wavesequence,itisusuallyamorestableequilibriumlevelthanintrabarpriceextremes.DeMark’stimingrulesdefinetheminimumcriterianecessarytocompleteeachwaveandinitiatethenext.thetimeaspectofthetDD-WaverequirementsOneofthethingsIstrugglewithmostinusingElliottwaveisdeterminingthetimingfortheoriginofaWavesequence.ForTDD-Wave,inthecaseofanuptrend(reverseforadowntrend)thefollowingisnecessary.nTDD-WaveRequirementsforWave1Toinitiateanup-wavesequence,1.TheoriginoftheTDD-Waveupsequenceisdefinedoncethemarketrecordsatwenty-one–bar–lowclose(acloselessthanalltwentypriorcloses).2.Onceconditiononeissatisfied,themarketmustpostathirteen-bar–highclose(aclosethatishigherthanalltwelvepriorcloses).ThisconfirmstheoriginoftheTDD-WavesequenceandestablishesthatthemarketisinTDD-Wave1.3.TDD-Wave1isnotconsideredcomplete,however,untilpricesubsequentlyreachesaneight-bar–lowclose(acloselessthanallsevenpriorcloses),which,inturn,confirmsthatTDD-Wave2isinprogress.nTDD-WaveRequirementsforWave21.Thefirstrequirementforwave2isthelastrequirementofwave1,thatis,thatthemarketrecordaneight-bar–lowclose(acloselessthanallsevenpriorcloses);Andthen2.TDD-Wave2continuesuntilthemarketrecordsatwenty-one–bar–highclose(aclosethatishigherthanalltwentypreviouscloses),reinforcingthenotionthatTDD-Wave3isunderway.nTDD-WaveRequirementsforWave31.Thefirstrequirementofwave3isthelastrequirementofwave2,thatis,thatTDD-Wave2continueuntilthemarketrecordsatwenty-one-bar–highclose03_Perl_ch03.indd748/08/57:35:28PM TDD-Wave75(aclosethatishigherthanalltwentypriorcloses),reinforcingthenotionthatTDD-Wave3isunderway;Andthen2.Thisremainsthecaseuntilweseeathirteen-bar–lowclose(acloselessthanalltwelvepriorcloses),therebysignalingthatTDD-Wave3iscompleteandTDD-Wave4isunfolding.nTDD-WaveRequirementsforWave41.Thefirstrequirementofwave4isthelastrequirementforwave3,thatis,thattherebeathirteen-bar–lowclose(acloselessthanalltwelvepriorcloses),therebysignalingthatTDD-Wave3iscompleteandTDD-Wave4isdeveloping;Andthen2.TDD-Wave4isconsideredcompletewhenthemarketsubsequentlypostsathirty-four–bar–highclose(aclosegreaterthanallthirty-threeclosesbeforeit),representingtheonsetofTDD-Wave5.nTDD-WaveRequirementsforWave51.Thefirstrequirementforwave5isthelastrequirementforwave4,thatis,thattherebeathirty-four-bar–highclose(aclosegreaterthanallpriorthirty-threecloses),therebysignalingthatTDD-Wave4iscompleteandTDD-Wave5isdeveloping;Andthen2.TDD-Wave5isconsideredcompletewhenthemarketsubsequentlypostsathirteen-bar–lowcloseforTDD-WaveA(aclosebelowalltwelvepriorcloses),representingtheonsetofTDD-WaveA.nTDD-WaveRequirementsforWaveA1.ThefirstrequirementforwaveAisthelastrequirementforwave5,thatis,thatthemarketpostathirteen-bar–lowclose(acloselessthanallpriortwelvecloses),representingtheonsetofTDD-WaveA;Andthen2.TDD-WaveAisconsideredcompletewhenthemarketsubsequentlypostsaneight-bar–highcloseforTDD-WaveB(acloseaboveallsevenpriorcloses),representingtheonsetofTDD-WaveB.03_Perl_ch03.indd758/08/57:35:29PM 76DeMarkIndicatorsnTDD-WaveRequirementsforWaveB1.ThefirstrequirementforwaveBisthelastrequirementforwaveA,thatis,aneight-bar–highcloseforTDD-WaveB(acloseaboveallsevenpriorcloses),representingtheonsetofTDD-WaveB;Andthen2.TDD-WaveBisconsideredcompletewhenthemarketsubsequentlypostsatwenty-one–bar–lowcloseforTDD-WaveC(aclosebelowalltwentypriorcloses),representingtheonsetofTDD-WaveC.nTDD-WaveRequirementsforWaveC1.ThefirstrequirementforwaveCisthelastrequirementforwaveB,thatis,atwenty-one–bar–lowcloseforTDD-WaveC(aclosebelowalltwentypriorcloses),representingtheonsetofTDD-WaveC;Andthen2.TDD-WaveCislockedwhenthemarketclosesbelowthelowcloseofTDD-WaveA.nAdditionalQualifyingRulesfortheApplicationoftheTDD-WaveIndicatorsforanUptrend1.ThepeakcloseofTDD-Wave3mustbehigherthanthepeakcloseofTDD-Wave1,andthepeakcloseofTDD-Wave5mustbeabovethepeakcloseofTDD-Wave3.2.ifapullbackfromTDD-Wave1issoshallowthatthedeclinefailstosatisfytheconditionsnecessarytoinitiateTDD-Wave2,andthemarketsubsequentlyrecoversabovewhathadbeentheTDD-Wave1highclose,thenTDD-Wave1willshiftovertotherightinlinewiththenewhighclose.3.ifapullbackfromTDD-Wave3issoshallowthatthedeclinefailstosatisfytheconditionsnecessarytoinitiateTDD-Wave4,andthemarketsubsequentlyrecoversabovewhathadbeentheTDD-Wave3highclose,thenTDD-Wave3willshifttotherightinlinewiththenewhighclose.4.ifapullbackfromTDD-Wave5issoshallowthatthedeclinefailstosatisfytheconditionsnecessarytoinitiateTDD-WaveA,andthemarketsubsequentlyrecoversabovewhathadbeenthehighcloseofTDD-Wave5,thenTDD-Wave5willshiftovertotherightinlinewiththenewhighclose.5.TDD-Wave5willbelockedintoplaceonlywhenTDD-WaveCviolatesthelowcloseofTDD-WaveAonaclosingbasis.untilthathappens,ifwhathadbeenTDD-WaveBclosesabovethehighcloseofTDD-Wave5,thenTDD-WavesAandBwillbeerased,andTDD-Wave5willshifttotheright.03_Perl_ch03.indd768/08/57:35:30PM TDD-Wave776.ifTDD-Wave2closesbelowthelowcloseofTDD-Wave1,thenTDD-Wave1willdisappear,andthecountmustbeginanew.(Similarly,ifthelowcloseofTDD-Wave4closesbelowthelowcloseofTDD-Wave2,thenTDD-Wave2willshifttowhereTDD-Wave4wouldotherwisehavebeen.)7.OnceTDD-WaveCviolatesthelowcloseofTDD-WaveA,TDD-Wave5islockedintoplaceandcannotmove.(Consequently,ifthemarketsubsequentlyclosesbackabovethehighcloseofTDD-Wave5,ratherthanerasingTDD-WavesA,B,andC,andmovingTDD-Wave5totheright,theindicatorwillinsteadlabelthemovetonewhighsasafreshTDD-Wave1advanceratherthanerasingthepreviousTDD-Wave5.)nAdditionalQualifiersfortheApplicationoftheTDD-WaveIndicatorsforaDowntrend1.ThetroughofthelowcloseofTDD-Wave3mustbelowerthanthelowcloseofTDD-Wave1,andthetroughofthelowcloseofTDD-Wave5mustbebelowthelowcloseofTDD-Wave3.2.ifareboundfromTDD-Wave1issoshallowthattheadvancefailstosatisfytheconditionsnecessarytoinitiateTDD-Wave2,andthemarketfallsbackbelowwhathadbeenthelowcloseofTDD-Wave1,thenTDD-Wave1willshifttotheright,inlinewiththenewlowclose.3.ifarallyfromTDD-Wave3issoshallowthattheadvancefailstosatisfytheconditionsnecessarytoinitiateTDD-Wave4,andthemarketfallsbackbelowwhathadbeenthelowcloseofTDD-Wave3,thenTDD-Wave3willshifttotheright,inlinewiththenewlowclose.4.ifarallyfromTDD-Wave5issoshallowthatthereboundfailstosatisfytheconditionsnecessarytoinitiateTDD-WaveA,andthemarketsellsoffbelowwhathadbeenthelowcloseofTDD-Wave5,thenTDD-Wave5willshifttotheright,inlinewiththenewlowclose.5.TDD-Wave5willbelockedintoplaceonlywhenTDD-WaveCviolatesthehighcloseofTDD-WaveA.untilthathappens,ifwhathadbeenTDD-WaveBtradesbelowthelowcloseofTDD-Wave5,thenTDD-WavesAandBwillbeerased,andTDD-Wave5willshifttotheright.6.ifTDD-Wave2closesabovethehighcloseofTDD-Wave1,thenTDD-Wave1willdisappear.(Similarly,ifTDD-Wave4closesabovethehighcloseofTDD-Wave2,thenTDD-Wave2willshifttotherighttowhereTDD-Wave4wouldotherwisehavebeen.)7.OnceTDD-WaveCviolatesthehighcloseofTDD-WaveA,TDD-Wave5islockedintoplaceandcannotmove.(Consequently,ifthemarketsubsequentlyclosesbackbelowthelowcloseofTDD-Wave5,ratherthanerasingTDD-WavesA,B,andC,andmovingTDD-Wave5totheright,theindicatorwillinsteadlabelthemovetonewhighsasafreshTDD-Wave1advance.)03_Perl_ch03.indd778/08/57:35:30PM 78DeMarkIndicatorsAswithTDSequential,TDD-Waverequiresthemarkettodemonstratethatitismovingdirectionallybysatisfyingspecifictrendingcriteriainordertocategorizeeachwave.Whenpricesaremovinglaterally,TDD-Waveissilent,whichmeansthereisnoneedtotrytointerpretthecomplexinternalwavestructureofamarketthat’sessentiallygoingnowhere.Whenmarketsareconfinedtorangesforaprolongedperiodoftime,thisaspectofTDD-Waveisparticularlyhelpful.Itisimportanttorememberthat,whileTDD-WaveissimilartoElliottwave,thetwoapproachesdohavetheirdifferences.AnElliotticianwouldbeshocked,forexample,tohearthatTDD-WavebreaksthecardinalElliottrule,thatwavemustnotbetheshortestwave.Althoughitisnotaregularoccurrence,therearesituationsinTDD-WavewhereTDD-Wave3istheshortestwave.Furthermore,notonlycanTDD-Wave4overlapTDD-Wave1’sextreme,itcanevenviolatethetroughofTDD-Wave2onanintrabarbasis,aslongasitdoesn’tclosebeyondtheextremecloseofTDD-Wave2.calculatingtDD-WaveprojectionsPersonally,I’minterestedinknowingonlytheprojectionsforTDD-Waves3(Figure3.3)and5(Figure3.4),butitisalsopossibletodetermineobjectivesforTDD-Waves2,4,andC.BecauseIreferenceclosingprices,nothighsandlows,todeterminewhichwavethemarketisin,Ialsopreferusingclosingpricestousinghighsorlowstoprojectfutureprices.nBullMarketPriceProjectionsTDD-Wave1:WaitforaTDD-Wave1advance.TDD-Wave2:TheTDD-Wave2pullbackshouldideallybe61.8percentofthedistancetraveledbetweenthelowcloseofTDD-Wave1andthehighcloseofTDD-Wave1.TDD-Wave3:TheTDD-Wave3upsideobjectiveisthendeterminedbya)takingthedifferencebetweenthelowcloseofTDD-Wave1andthehighcloseofTDD-Wave1,b)multiplyingthatvaluebyafactorof1.618,and,then,c)addingthatresulttothelowcloseofTDD-Wave1.TDD-Wave4:a)ifTDD-Wave2wasshallow,thatis,intheregionof38.2percentofTDD-Wave1,thentheexpectedretracementforTDD-Wave4wouldbe03_Perl_ch03.indd788/08/57:35:31PM 9.000058.76488.4075X+(X*1.618)38.500018.000042X7.50000Nov29Dec31Jan31Feb28Mar31Apr30May30Jun30Jul31Aug29Sep30Oct31Nov28Dec31Jan30Feb2720022003Figure3.3UpsideProjectionforTDD-Wave3ThedailychartofeurNOKdisplaysanupsideprojectionforTDD-Wave3.itiscalculatedbymultiplyingthedifferencebetweenthelowcloseof0andthehighcloseof1by1.618andaddingtheresulttothelowcloseof0.9.000058.7648X+(X*1.618)8.407538.50001X8.0000427.50000Nov29Dec31Jan31Feb28Mar31Apr30May30Jun30Jul31Aug29Sep30Oct31Nov28Dec31Jan30Feb2720022003Figure3.4UpsideProjectionforTDD-Wave5ThedailychartofeurNOKdisplaysanupsideprojectionforTDD-Wave5.itiscalculatedbymultiplyingthedifferencebetweenthelowcloseof2andthehighcloseof3by1.618andaddingtheresulttothelowcloseof2.7903_Perl_ch03.indd798/08/57:35:36PM 80DeMarkIndicators61.8percentofthedistancetraveledbetweenthelowcloseofTDD-Wave3andthehighcloseofTDD-Wave3;butb)ifTDD-Wave2wasdeep,thatis,intheregionof61.8percentofTDD-Wave1,thentheexpectedretracementforTDD-Wave4wouldbe38.2percentofthedistancetraveledbetweenthelowcloseofTDD-Wave3andthehighcloseofTDD-Wave3.TDD-Wave5:a)TakethedifferencebetweenthelowcloseofTDD-Wave3andthehighcloseofTDD-Wave3;b)multiplyitbyafactorof1.618;andc)addthatvaluetothelowcloseofTDD-Wave3.TDD-WaveC:a)TakethedifferencebetweenthehighcloseofTDD-WaveAandthelowcloseofTDD-WaveA;b)multiplyitbyafactorof1.618;andc)subtractthatresultfromthehighcloseofTDD-WaveA.theUltimatetargetsfortDD-Waves5andcDeMark’soriginalexplanationoftheTDD-WaveprojectionfocusedondeterminingtheultimatetargetsforTDD-Waves5andC.nUpsideTargetforTDD-Wave51.TakethedifferencebetweenthelowofTDD-Wave1andthehighofTDD-Wave1;2.Multiplyitbyafactorof1.382;and3.AddtheresultingvaluetothelowofTDD-Wave2(notingthat,ifTDD-Wave3exceedsthatlevel,then2.764shouldbesubstitutedfortheoriginal1.382value).nDownsideTargetforDownsideTDD-WaveC1.TakethedifferencebetweenthehighofTDD-WaveAandthelowofTDD-WaveA;2.SubtracttheresultfromthehighofTDD-WaveB;and3.Multiplythatvalueby1.618.BearMarketpriceprojectionsBecauseIreferenceclosingpricesratherthanhighsandlowstodeterminewhichwavethemarketisin,Iuseclosingprices,ratherthanhighsorlows,forpriceprojections(Figures3.6and3.7).03_Perl_ch03.indd808/08/57:35:36PM 1.60000X21.550011.500041.45001.4093X–(X*1.618)31.40001.35001.333151.3000Mar15Mar30Apr16Apr30May15May31Jun15Jun29Jul16Jul31Aug15Aug31Sep14Sep28Oct15Oct31Figure3.5DownsideProjectionforTDD-Wave3ThedailychartofeurCADdisplaysadownsideprojectionforTDD-Wave3.itiscalculatedbymultiplyingthedifferencebetweenthehighcloseof0andthelowcloseof1by1.618andsubtractingtheresultfromthehighcloseof0.1.6000021.550011.5000X41.45001.409331.40001.35001.3331X–(X*1.618)51.3000Mar15Mar30Apr16Apr30May15May31Jun15Jun29Jul16Jul31Aug15Aug31Sep14Sep28Oct15Oct31Figure3.6DownsideProjectionforTDD-Wave5ThedailychartofeurCADdisplaysadownsideprojectionforTDD-Wave5.itiscalculatedbymultiplyingthedifferencebetweenthehighcloseof2andthelowcloseof3by1.618,andsubtractingtheresultfromthehighcloseof2.8103_Perl_ch03.indd818/08/57:35:41PM 82DeMarkIndicatorsnUsingClosingPricesforPriceProjections1.AfteraTDD-Wave1decline,theTDD-Wave2reboundshouldbe61.8percentofthedistancetraveledbetweenthehighcloseofTDD-Wave1andthelowcloseofTDD-Wave1.2.TheensuingTDD-Wave3downsideobjectiveisdeterminedbya)takingthedifferencebetweenthehighcloseofTDD-Wave1andthelowcloseofTDD-Wave1,b)multiplyingthatvaluebyafactorof1.618,andthenc)subtractingtheresultfromthehighcloseofTDD-Wave1.nTDD-Wave2:Shallowvs.DeepIfTDD-Wave2wasshallow,thatis,intheregionof38.2percentofTDD-Wave1,ThenTheexpectedretracementforTDD-Wave4wouldbe61.8percentofthedistancetraveledbetweenthehighcloseofTDD-Wave3andthelowcloseofTDD-Wave3.IfTDD-Wave2wasdeep,thatis,intheregionof61.8percentofTDD-Wave1,ThenTheexpectedretracementforTDD-Wave4wouldthenbe38.2percentofthedistancetraveledbetweenthehighcloseofTDD-Wave3andthelowcloseofTDD-Wave3.nToCalculatetheObjectiveforTDD-Wave51.TakethedifferencebetweenthehighcloseofTDD-Wave3andthelowcloseofTDD-Wave3,2.Multiplythatbyafactorof1.618,and3.SubtractthatvaluefromthehighcloseofTDD-Wave3.nToCalculateTDD-WaveC1.TakethedifferencebetweenthelowcloseofTDD-WaveAandthehighcloseofTDD-WaveA,2.Multiplythatbyafactorof1.618,and3.AddthatvaluetothelowcloseofTDD-WaveA.Asmentionedabove,DeMark’soriginalexplanationoftheTDD-WaveprojectionfocusedondeterminingtheultimatetargetsforTDD-Waves5andC.Herearehisthoughts:03_Perl_ch03.indd828/08/57:35:42PM TDD-Wave83nToDeterminetheEventualDownsideObjectiveforTDD-Wave51.TakethedifferencebetweenthehighofTDD-Wave1andthelowofTDD-Wave1;2.Multiplythatbyafactorof1.382;and3.SubtracttheresultfromthehighofTDD-Wave2(notingthat,ifTDD-Wave3exceedsthatlevel,then2.764shouldbesubstitutedfortheoriginal1.382value).nToDeterminetheUpsideObjectiveforTDD-WaveC1.TakethedifferencebetweenthelowofTDD-WaveAandthehighofTDD-WaveA,2.AddtheresulttothelowofTDD-WaveB,and3.Multiplythatvalueby1.618.tDD-WaveFrequentlyaskedQuestionsMostofthetime,twoalternateTDD-Wavecountsareevident—abullishandabearishscenario.HowdoIdifferentiateobjectivelybetweenthetwopossibilities,toarriveatapreferreddirectionalTDD-Wavecount?ThisisanissueIstruggledwithforquitesometime,butIfoundthatcombiningTDD-Wavewithamomentum-basedoscillatorlikeWellesWilder’sRelativeStrengthIndex(RSI)canresultinanobjective,directionalconclusion.nTheRelativeStrengthIndexTherSiisoneofthefewnon-DeMarkindicatorsiuseinconjunctionwiththeTDstudies.Theindicatortakesthepriorfourteenperiodsandcomparesthestrengthoftheupanddownmovesoverthatperiodtofigureoutwhetherthebullsorbearsareincontrolofpriceaction.AveragingtheupanddownmovesbetweenbarsonaclosingbasisoverthattimeresultsintherelativeStrength(rS).Theinformationcanbetranslatedintoindexform(rSi),calibratedbetweenzeroandonehundred,usingtheformularSi5100[100/11rS].ThemajorityoftradersuseoscillatorstoidentifyprospectiveoverboughtoroversoldsituationsortohighlightdivergencesbetweenTheRSIwaspresentedin1978byWellesWilder,inhisbookNewConceptsinTechnicalTradingSystems.03_Perl_ch03.indd838/08/57:35:43PM 84DeMarkIndicatorsmomentumandpriceaction,butthatapproachisflawed,becausetheRSIiscalibratedbetweenzeroandonehundred,and,inastronguptrend,forexample,themarkettypicallydoesn’tenterextremeoversoldterritoryduringacorrectivedownmove.Furthermore,anextremeoverboughtreadingisoftenassociatedwithstrongbuyinginterest,ratherthanupsidetrendexhaustion.CombiningtheRSIwithTDD-Wave,ontheotherhand,helpstoputboththeTDD-Wavesequenceandthecorrectivepriceactionintocontextrelativetothebroadertrend.Duringtheearlystagesofatrend(particularlyTDD-Wave1),itisfairlycommonfortheRSItobecomeoverextended,andnotunusualformultipledivergencesignalstomanifestthemselves,possiblymakingtraderswaryaboutstickingwiththedevelopingtrend.TheRSI,however,afterbeingoverboughtoroversoldforaprolongedperiodoftimeinthedirectionoftheunderlyingtrend,willoftenreverttoamildlyoverboughtoroversoldstate.Indoingso,itregainsitscomposureaheadofaresumptionofthebroaderdevelopingtrend.Ifwecouldisolatetheseturnsinmomentum,TDD-Waveinterpretationwouldbemuchclearer,whichwouldbeadistinctadvantage.Typically,overboughtandoversoldRSIzonesaresetatseventyfiveandtwenty-fiverespectively.Thisisallwellandgoodwhenmarketsareconfinedtoranges,but,forreasonsstatedearlier,itislesshelpfulwhenpricesaretrendingdirectionally.Ifadditionalthresholdsareincorporatedatfortyandsixty,respectively,however,themoderatecorrectionsreferredtoabovebecomemoreapparent.Broadlyspeaking,ifthemarketisadvancingaspartofabullishTDD-Waveupsequence,thentheRSIshouldremainabovefortyduringcorrectivesetbacksforTDD-Waves2and4(Figure3.7).Similarly,ifthemarketisdecliningaspartofabearishTDD-Wavedownsequence,thentheRSIshouldremainbeneathsixtyduringcorrectiveralliesforTDD-Waves2and4(Figure3.8).SincewealsoknowthatTDD-Wavesshouldnotoverlap(inanuptrendforexample,thelowcloseofTDD-Wave4shouldnotbelessthanthelowcloseofTDD-Wave2,andthelowcloseofTDD-Wave2shouldnotbebelowthelowclosefortheoriginofTDD-Wave1),itshouldbepossibletoisolateacuterisk/rewardtradingopportunitiesthatcoincidewiththeterminationofeachcorrective03_Perl_ch03.indd848/08/57:35:43PM 1.274951.280031.26001.2400141.22001.2000201.180080604020May15May31Jun15Jun30Jul14Jul31Aug15Aug31Sep15Sep29Oct16Oct31Figure3.7Uptrend:TDD-WaveCombinedwiththeRelativeStrengthIndicatorinthedailychartofuSDCHF,notehowsetbacksinthebroaduptrendfindsupportattherSilevelofforty,therebybiasingthecounttothebullishside.1.6000021.550011.500041.45001.409331.40001.33311.350051.300080604020Mar15Mar30Apr16Apr30May15May31Jun15Jun29Jul16Jul31Aug15Aug31Sep14Sep28Oct15Oct31Nov15Figure3.8Downtrend:TDD-WaveCombinedwiththeRelativeStrengthIndicatorinthedailychartofeurCAD,notehowralliesinthebroaddowntrendfindresistanceattherSilevelofsixty,therebybiasingthecounttothebearishside.8503_Perl_ch03.indd858/08/57:35:48PM 86DeMarkIndicatorsmove,particularlyiftheexpectedterminationofeachcorrectivemoveisaccompaniedbyaTDSequentialoraTDCombobuysignal—eitheraTDBuySetuporaTDBuyCountdown.Let’stakealookathowthisfitswithpriceactioninmorepracticalterms,asatrendunfolds:•Whenastrongbullmarketisunderway,TDD-WavepricecorrectionsoughttofindsupportattheRSIsixtylevel,whiledeeperTDD-WavepricesetbacksshouldbeunderpinnedbytheRSIfortylevel.•Whenastrongbearmarketisunderway,TDD-WavecorrectivepricerecoveriesoughttofindresistanceattheRSIfortylevel,whilelarger-degreeTDD-WavepricereboundsshouldberebuffedbytheRSIsixtylevel.•WhenapricesetbackinabullmarketissufficientlystrongtoviolatesupportattheRSIfortylevel(particularlywhenthatlevelhasheldforaprolongedperiodoftime),it’softenaprecursorofareversalofthebroadertrendandaswitchfromabullishtoabearishTDWavestructure.•WhenapricerecoveryinabearmarketissufficientlystrongtoviolateresistanceattheRSIsixtylevel(particularlywhenthatlevelhasheldforaprolongedperiodoftime),it’softenaprecursorofareversalofthebroadertrendandaswitchfromabearishtoabullishTDWavestructure.•TodetermineTDD-Wave5peaksandtroughs,useoftheRSIcanbeextremelyhelpful,sincetheseinvariablydivergefromthepricepeaksortroughsofTDD-Wave3.Thisdivergenceresultsinwhatiscommonlyknownasafailureswing,wherebythepricepostsanewhighrelativetothepreviousmarkettop,oranewlowrelativetotheprevioustroughinthemarket—butthecorrespondingRSIvaluefailstoexceedtheprevioushigh(duringanuptrend),orgobelowthepreviouslow(duringadowntrend).•Whennofailureswingisapparent,it’softenareflectionofthefactthattheunderlyingtrendisverypowerful,andaTDD-Waveextension,ratherthanareversal,islikely.HowshouldItradetheTDD-Wavesequence?•InitiatepositionsonthebreakoftheTDD-Wave1extreme,inlinewiththeunderlyingtrend,sincethisreinforcesthenotionthatthemarketislikelytobeintheimpulsiveTDD-Wave3directionalphase;03_Perl_ch03.indd868/08/57:35:49PM TDD-Wave87•Remainonthesidelines,orfollowashort-termscalpingapproach,notlookingfordirectionalmovesduringTDD-Wave4;•EstablishpositionsinthedirectionofthedominanttrendaspricebreakstheextremeofTDD-Wave3whenthemarketisinTDD-Wave5;and•InitiatecountertrendtradesattheendofTDD-Waves5andB.Someoftheadviceaboveissimplystatingtheobvious.WhatadditionaladvantageisthereformeinusingTDD-Wave?Youcanusethestudyinisolation,butIwouldsuggestcombiningitwithotherTDindicators,suchasTDSequentialand/orTDCombo.WhileTDD-Wavedefinesprospectivepricetargetsandhelpstodeterminethestageofthetrendpriceaction,TDSequentialandTDComboisolatepotentialprice-exhaustionlevels.IbelievethisapplicationoftheindicatorsismorevaluablethansimplywaitingfortheextremesofTDD-Waves1and3tobreak,inordertoputadirectionaltradeon.Remember,theBloombergterminalindicates(withanarrow)whentheminimumcriteriaforthecompletionofeachTDD-Wavehavebeensatisfied.IfthatarrowhappenstocoincidewithacompletedTDSequentialCountdown,TDComboCountdownsignal,orasituationinwhichthemarketcompletesaTDSetupaheadofaTDSTlevel,itoftenpresentsanacuterisk/rewardtradingopportunity.Infact,theoptimumtimestotradearewhenanyofthesesignalscoincideswiththesatisfactionoftheminimumconditionsforTDD-Wave2orTDD-WaveB.Ratherthanwaitingforconfirmation,ifyoucanidentifythestartofTDD-Wave3orthebeginningofTDD-WaveC,youwillhaveadistinctadvantageoverothertraders.BeingabletoisolatetheprospectiveoriginofTDD-Wave3isparticularlyusefulwhenyouaretradingoptions.Forexample,priortoTDD-Wave3up’sovercomingTDD-Wave1,thebroadermarketdoesn’trecognizethereversalyet.MosttradersbelievethatTDD-Wave1isananomalyandthatthesetbackinTDD-Wave2willexceedtheoriginofTDD-Wave1,therebyreinstatingthebroaderdowntrend.Often,theriskreversalonoptions(whichmeasuresthemarket’spreferenceforputsorcallsrelativetotheunderlyinginstrument)favorsthedownsideatthispoint,and,ifTDD-Wave2hasnotbeenparticularlychoppy,optionvolatilitywillalsobequitelow.03_Perl_ch03.indd878/08/57:35:50PM 88DeMarkIndicatorsForthosewholiketotradeTDsignalsviaoptions,thebestopportunityisattheprospectivestartofTDD-Wave3.Ifyou’recorrectandyoumanagetocatchtheendofTDD-Wave2,youbenefitfromthe“doublewhammy”ofincreasedvolatilitywhenpriceclearsthehighofTDD-Wave1andofthedirectionalimplicationsofbeinginvolvedinatrendbeforeitturnsimpulsive.DiscerningwhetherthemarketisinWaveCorWave3isalsoachallengeforElliotticians.If,followingwhatyouthinkisaWave2pullback,youtradethebreakofwhatwouldbeWave1’sextreme,thinkingatrendreversalisunderway,anditturnsouttobeWaveCratherthanwave3,youendupeithersellingneartheloworbuyingnearthetopofanexhaustivemoveup.TheadvantageofcombiningTDD-WavewithTDSequentialorTDCombo,then,isthatyoucanidentifyprospectivetrendreversalsearlyon.Ofcourse,there’sstillariskthatyoumightbeseeingTDD-WaveCandnotTDD-Wave3,butthatdoesn’tmattersomuchifyouactearly.BothTDD-WaveCandTDD-Wave3havethesamedirectionalimplications—it’sjustaquestionofmagnitude.TDD-WaveCpostsamarginalandunsustainablebreakofTDD-WaveA’sextreme,whereasTDD-Wave3hasanimpulsivebreakoftheTDD-Wave1priceextreme.Forthisreason,if,ratherthanwaitingforthebreakofTDD-Wave1orTDD-WaveAforconfirmationofachangeindirection,youinitiateapositionatthestartofTDD-WaveCorTDD-Wave3,youcantrailyourstop-losstoentrywhentheextremepriceofTDD-WaveAorTDD-Wave1isviolated.Icanseehowremovinginternalcountsreducesconfusionwhenmarketsaretradinginawideandchoppyrangeforaprolongedperiodoftime,but,ifIdon’ttrytodothat,howdoIfigureoutthebiggerorsmallerpicture?Remember,TDD-Waveisbasedonrelativepriceaction,andso,ifyouparticularlywanttoseeTDD-Wavecountsofahigherorlowerdegree,yousimplyapplythestudytoalongerorshortertimeframe.Ifindlookingatlongertimeframesparticularlyhelpful,becauseitenablesmetodiscernwhetherapricemoveisanimpulse—oracorrectivewaverelativetothebiggerpicture.TrendsarelikelytobeextremelyimpulsiveifamarketisinTDD-Wave3onadaily,weekly,andmonthlybasis,forexample.ImaginehowpowerfulthatinformationcouldbeifyouwereabletoidentifythestartofthemovewithTDSequentialand/orTDCombo.03_Perl_ch03.indd888/08/57:35:50PM TDD-Wave89Fromalonger-termpositioningperspective,it’salsohelpfultoknowonadaily,weekly,andmonthlybasiswhenamarketisinTDD-Wave5,sincethatinformationprovidesaninvaluableinsightintoprospectsforthebroadertrendandontheproperpositioningformoreacutedirectionaltradingopportunitiesfromarisk/rewardperspective.ThefirstinstanceinwhichTDD-Wave3linesupinmultipletimeframesiswhenatradershouldexpressviewsmoreforcefullyintermsofleveragedpositioning.ThefirstinstanceinwhichTDD-Wave5isconfirmedinmultipletimeframesiswhenlonger-termtraders,whohadbeenpositionedinthedirectionofwhathadbeenthebroadertrendupuntilthatpoint,shouldbegintoreducetheirmarketexposure.Attheveryleast,theyshouldpurchasesomeprotectionfortheunderlyingpositioninanticipationofabroadertrendreversal.CanIexperimentwithdifferentnumbersfortheTDD-Wavequalifiers?Yes,youcan,aslongasthenumberofbarsinyoursequencemaintainsthesameratiorelationshipsastherecommendedtwenty-one–,thirteen–,eight–,twenty-one–,thirteen–,thirty-four–,thirteen–,eight–,andtwentyone–barsequence.tDD-Wave:recommendedSettings03_Perl_ch03.indd898/08/57:35:51PM 90DeMarkIndicators03_Perl_ch03.indd908/08/57:35:52PM chapter4TDLinesOneofthesimplestandmostwidelyusedtechnical-analysistoolsisthehumbletrendline,but,ironically,thiscornerstoneofresearchsitsonrockyfoundations.Givearoomfullofpeoplethesamepricechart,andaskthemtoinserttrendlinesonit,andyoucanbesureoftwothings:1)thateveryonewilldrawsomethingcompletelydifferent,and2)that,moreoftenthannot,thetrendlineswillbeconstructedbasedonsubjective,directionalbiasesratherthansound,objectivereasoning.(Noprizesforguessing,forexample,thebullishorbearishpreferencesofsomeonewhooptstodrawanupward-slopingchannel.)DeMark’sapproachtotheconstructionoftrendlinesmaynotbeconventional,butitiscertainlyobjectiveandcompletelyremoveswishfulthinkingfromthedecision-makingprocess.AswithmanyotherTDindicators,DeMark’strendlinetheorycanbepracticallyappliedtoanymarketortimeframe,andsothemethodologyisequallyrelevantwhetheryouaredaytradingorpositiontrading.Thekeytodrawingtrendlinesobjectivelyisselectingtherightpoints.DeMarkcontendsthatthemostsignificantpointstoconnectarepivotpoints,thatis,levelsthatcoincidewithtrendreversals.Alowsurroundedoneithersidebyhigherlowsissignificant,asisahighborderedbylowerhighs.DeMarkreferstotheselevelsasTDPoints,andthelinesconnectingthemasTDLines.Theirsignificanceisdeterminedbythenumberofsurroundinghighsandlows.Forexample,ahighthathasfivelowerhighsoneithersideofitislabeledaLevelFiveTDSupplyPoint,whilealowwiththreehigherlowsoneithersideof9104_Perl_ch04.indd918/08/57:36:36PM 92DeMarkIndicatorsLevel92.1000TDSupplyPointLevel4TDSupplyPoint2.0500Level12Level7TDDemandPointTDSupplyPointLevel5TDDemandPoint2.0000Level6TDDemandPoint1.9500…Oct31Nov8Nov15Nov22Nov30Dec7Dec14Dec24Dec31Jan8Jan152007Figure4.1TDPointsAhighwithsevenlowerhighsoneithersideofitisaLevelSevenTDSupplyPoint,whilealowwithsixhigherlowsoneithersideofitisaLevelSixTDDemandPoint.itisaLevelThreeTDDemandPoint.YoucanselectTDPoints(Figure4.1)ofanyleveltoconstructTDLines,butmypersonalpreferenceisLevelOneTDLines,sincetheyaremoreresponsivetopriceactionthanhigher-levelTDPoints,andthereforeprovideanearlierbreakoutsignal.Thatsaid,itisworthmonitoringTDLinesonmultipletimeframesand/orTDLinesondifferentlevels,sincebreakoutsaremorelikelytobesignificantwhenclusteredlinesgivewaysimultaneously.Unlikethetrendlinesintraditionaltechnicalanalysis,whichrequireaminimumofthreepointstoconstruct,aTDLineneedsonlytworeferencepoints.Furthermore,inrecognitionofthefactthatmarketsaredynamicandthatrecentpriceactionisarguablymoresignificantthanpriceactionfurtherinthepast,TDLinesaredrawnfromrighttoleft,ratherthanlefttoright,usingthetwomostrecentTDPoints.Todeterminesupport,connectthetwomostrecentTDDemandPointsofthesamemagnitude(fromrighttoleft)todrawanupward-slopingTDDemandLine.Todetermineresistance,connectthetwomostrecentTDSupplyPointsofthesamemagnitude(fromrighttoleft)todrawadownward-slopingTDSupplyLine(Figure4.2).04_Perl_ch04.indd928/08/57:36:40PM TDLines931190011800117001160011500114001130011200111001100010900OctNovDec200810172401081522290105121926031017240207142128Figure4.2TDLinesConnectingthemost-recentLevelThreeTDDemandPointwiththenext-mostrecent,lowerLevelThreeTDDemandPointresultsinaLevelThreeTDDemandLine.Connectingthemost-recentLevelThreeTDSupplyPointwiththenext-most-recent,higherLevelThreeTDSupplyPointresultsinaLevelThreeTDSupplyLine.TDDemandPointsandTDSupplyLinesareconstantlybeingredefinedasnewTDDemandPointsandTDSupplyPointsappear,insuringthattheyadaptdynamicallyaspriceactionunfolds.HavingdeterminedhowtoconstructTDDemandLinesandTDSupplyLines,DeMarkdevelopedasetofrulesabouthowpricesshouldrespondtotheselevels.Heobservedthatunexpectedtrendlineviolationsoftenovershootinthedirectionofthebreak,asstop-lossesaretriggeredandtrendfollowersorbreakouttradersexaggeratethemoveinthenearterm.Conversely,short-termbreakoutstendtonotfollowthroughimmediatelyontrendlineviolationsthathavebeenwidelyanticipated,sincetradershavethosepositionsonaheadofthebreak.DeMark’srulesdistinguishbetweenqualified,orsolid,trendlinesanddisqualified,orbroken,trendlines,andsotraderscaninitiatefreshpositionsinthedirectionofaqualifiedintrabarbreak—andfademoveswhen04_Perl_ch04.indd938/08/57:36:42PM 94DeMarkIndicatorsadisqualifiedintrabarviolationoccurs.Thisinsightisparticularlyuseful,becauseconventionaltechnicalanalysisarguesoneshouldwaitfortheviolationofatrendlineonaclosingbasisbeforeenteringapositioninthedirectionofthebreakout.thethreetDDemandLineQualifiersOnceyou’veconstructedaTDDemandLine,eachoneofthefollowingthreeconditions(Figure4.3)needstobetakenintoaccounttodeterminewhetherinitiatingafreshtradeinthedirectionofthebreakiswarranted,priortotheclose.Aslongasoneormoreoftheconditionsaresatisfied,anintrabartrendlinebreakisexpected,andaclosingviolationbeyondthebreakoutlevelislikely.■TDDemandLineQualifierConditionOneAssumingthepricebarthatviolatesaTDDemandLinetothedownsideiscalledbarX,youneedtocomparethecloseofX21(thatis,thepricebarpriortothedownsidebreakout)withthecloseofX22(thatis,theclosetwopricebarsbeforethedownsidebreakout).IfThecloseofX21ishigherthanthecloseofX22,ThenThere’sareasonablechancethatbarXwillclosebeneathTDDemandLinesupport.Thelogicforthisreasoningisthat,ifahighercloseoccurspriortoadownsidebreakofaTDDemandLine,marketparticipantsarepredisposedtothinkingthatupwardmomentumwillcontinue,andnear-termbuyingpressurepersists.Consequently,whenpricesbreaklowerunexpectedly,bullsareforcedtostopoutoflongpositions,whilebearsestablishfreshshorts,therebyincreasingthelikelihoodofaclosebelowTDDemandLinesupport.Conversely,ifwehavealowerclosethebarbeforeadownsideviolationofaTDDemandLine,thatintrabarbreakislesslikelytobesustainedonaclosingbasis,sinceshort-termtraderswerealreadypositionedforthemoveinanticipationoffurtherweakness.Practicallyspeaking,thismeansthat,ifthereisanupclosethebarbeforea04_Perl_ch04.indd948/08/57:36:43PM TDLines95MarketopensbelowtheTDDemandLine,suggestingthedownsidebreakoutisqualifiedandlikelytofollowthrough,i.e.,closebelowtheTDDemandLine.[X-1]Condition2[X-2]xx'Condition3Shortsjustifiedasprojectedx'isnotXbelowtheTDDemandLine.Condition1Closeofbar[X-1]ishigherthanthecloseofbar[X-2]fortheperiodpriortothebreakout,sotheintrabardownsideviolationoftheTDDemandLineisqualified,justifyingshortentryonthebreakofthetrendlineratherthanhavingtowaitforthecloseforconfirmation.Figure4.3TheThreeDifferentConditionsThatWouldProduceaValidTDDemandLineBreakdownsidebreakofaTDDemandLine,thenyoucansellonthebreakoftheTDDemandLine,expectingaclosebelowit.IfyouseeadownclosethebarbeforeadownsideviolationofaTDDemandLine,thenyoucanfadetheintrabarTDDemandLinebreak,expectingthemarkettoclosebackaboveit.■TDDemandLineQualifierConditionTwoIfThepriceopensbelowaTDDemandLine,Thenitindicatesthatnewsellingpressurehasshiftedthenear-termsupply/demanddynamicinfavorofthebears,meaningthatthebreakwouldbeconsideredaqualifiedviolationofsupportinTDterms,andyoucouldthereforesellonthebreakoftheTDDemandLine,expectingthemarkettoclosebelowit.Assumingthatneitherofthefirsttwoconditionsissatisfied,youcanuseonefinalqualifiertomeasuresellingpressure,thatis,supply,aheadofaTDDemandLinedownsidebreakout.04_Perl_ch04.indd958/08/57:36:45PM 96DeMarkIndicators■TDDemandLineQualifierConditionThree1.AssumingabreakoutbarX,identifythepricebarbeforetheTDDemandLinedownsideviolation(X21),andcalculatethedifferencebetweenthatbar’scloseandthegreaterofeithera)thatbar’shighorb)thepreviousbar’sclose(closeofX22);and2.SubtractthatvaluefromthecloseofX21.IfTheresultingnumberisabovetheTDDemandLine,ThenSellontheintrabarbreakoftheTDDemandLine,expectingthemarkettoclosebelowit.IfThenumberisbelowtheTDDemandLinesupport,ThenTheintrabarbreakisconsidereddisqualified,andislesslikelytofollowthroughtotheupsideonaclosingbasis;thatis,youcanfadethemoveintrabar.calculatingtheObjectiveforatDDemandLineBreakYou’llrecallfromPhysics101thateveryactionhasanequalandoppositereaction.ButitisDeMark’scontentionthatthislawofmotionisn’tconfinedtothesciencelab,thatitcanalsobeappliedtomarkets,andthatthereisoftensomesymmetryinmarkets.WhathappensintermsofpriceactionaboveaTDDemandLineisoftenreplicatedbelowit,followingaqualifieddownsidebreak(Figure4.4).■ToDeterminetheObjectiveforaQualifiedDownsideViolation1.identifythehighesttruehighabovetheTDDemandLine,anddropaperpendicularlinetothecorrespondingTDDemandLinebelowit.2.Subtractthatvaluefromthepointwherethequalifiedbreakoutoccurred.Theobjectiveremainsintactunlessthemarkethasaqualifiedbreakouttotheupside—inwhichcasethesupply/demanddynamicswillhaveshifted,orthedownsidetrendlinebreakouttargetwillhavebeenreached.04_Perl_ch04.indd968/08/57:36:46PM TDLines97ACBDFigure4.4CalculatingtheDownsideObjectiveforaTDDemandLineBreakidentifythehighesttruehighabovetheTDDemandLine(PointA),anddropaperpendicularlinetothecorrespondingTDDemandLinebelowit(PointB).Subtractthevalueoftheperpendicularline(A2B)fromthepointatwhichthequalifiedbreakoutoccurs(PointC),whichgivesyoutheprojecteddownsidetarget(PointD).Now,havingenteredashortpositionfollowingaqualifiedintrabardownsidebreakofaTDDemandLine,youneedsomerulestogetyououtofthatpositionifthingsdon’tplayoutaccordingtoplan.■ExitingaShortPositionUsingTDDemandLineTherearethreeguidelinesforclosingoutashorttradefollowinganunsuccessfulbreakofaTDDemandLine:1.iftheopenofthebarimmediatelyafterthedownsidebreakoutisabovetheTDDemandLinebreakoutlevel,exitattheopen.2.iftheopenofthebarimmediatelyafterthedownsidebreakoutisabovetheTDDemandLine,andthebarclosesabovetheTDDemandLinebreakoutlevel,exitattheclose.3.ifthelowofthebarfollowingtheTDDemandLinebreakfailstorecordalowerlowthanthelowofthebreakoutbar,exitattheclose.tDSupplyLineQualifiersOnceyou’veconstructedaTDSupplyLine,eachoneofthefollowingthreeconditions(Figure4.5)needstobetakenintoaccounttodeterminewhetherornotinitiatingafreshlongpositioninthedirectionof04_Perl_ch04.indd978/08/57:36:48PM 98DeMarkIndicatorsXCondition2MarketopensabovetheTDSupplyLine,suggestingthebreakoutisqualifiedandlikelyto[X-2]followthroughtotheupside,i.e.,closeabovethe[X-1]TDSupplyLine.Condition3Condition1LongsjustifiedasprojectedCloseofbar[X-1]islowerthanthecloseofbarx'isnotabovetheTDSupply[X-2]fortheperiodpriortothebreakout,sotheLine.intrabarupsideviolationoftheTDSupplyLineisqualified,justifyinglongentryonthebreakofthetrendlineratherthanhavingtowaitfortheclosex'xforconfirmation.Figure4.5TheThreeDifferentConditionsThatWouldProduceaValidTDSupplyLineBreakthebreakiswarrantedpriortotheclose.Aslongasoneormoreoftheconditionsissatisfied,anintrabartrendlinebreakisexpectedandaclosingviolationbeyondthebreakoutlevelislikely.■InitiationofaFreshLongPositionQualifierOneAssumingthepricebarthatviolatesaTDSupplyLinetotheupsideisbarX,youneedtocomparethecloseofX21(thatis,thebarpriortotheupsidebreakout)withthecloseofX22(thatis,theclosetwobarsbeforetheupsidebreakout).ifthecloseofX21islowerthanthecloseofX22,thenthere’sareasonablechancethatbarXwillcloseaboveTDSupplyLineresistance.Thelogicforthisreasoningisthat,ifalowercloseoccurspriortoanupsidebreakofaTDSupplyLine,marketparticipantsarepredisposedtothinkingthatdownwardmomentumwillcontinueandnear-termsellingpressurewillpersist.Consequently,whenpricesbreakhigherunexpectedly,bearsareforcedtostopoutofshortpositions,whilebullsestablishfreshlongs,therebyincreasingthelikelihoodofacloseaboveTDSupplyLineresistance.Conversely,ifahighercloseoccursthebar04_Perl_ch04.indd988/08/57:36:50PM TDLines99beforeanupsideviolationofaTDSupplyLine,thatintrabarbreakislesslikelytobesustainedonaclosingbasis,sinceshort-termtraderswillhavealreadybeenpositionedforthedownmoveinanticipationoffurtherweakness.Practicallyspeaking,thismeansthat,ifyouseeadownthatclosesthebarbeforeanupsidebreakofaTDSupplyLine,youcanbuyonthebreakoftheTDSupplyLine,expectingacloseaboveit.IfyouseeanupclosethebarbeforeanupsideviolationofaTDSupplyLine,youcanfadetheintrabarbreakoftheTDSupplyLine,expectingthemarkettoclosebackbelowit.■InitiationofaFreshLongPositionQualifierTwoifapriceopensaboveaTDSupplyLine,itindicatesthatnewbuyingpressurehasshiftedthenear-termsupply/demanddynamicinfavorofthebulls.Assuch,thebreakwouldbedeemedtobeaqualifiedviolationofresistanceinTDterms,andyoucouldthereforebuyonthebreakoftheTDSupplyLine,expectingthemarkettocloseaboveit.Assumingneitherofthefirsttwoconditionsissatisfied,youcanuseonefinalqualifiertomeasurebuyingpressure,thatis,demandaheadofaTDSupplyLineupsidebreakout(Figure4.6).DBCAFigure4.6CalculatingtheUpsideObjectiveforaTDSupplyLineBreakidentifythelowesttruelowbelowtheTDSupplyLine(PointA),andextendaperpendicularlineuptocorrespondingTDSupplyLineaboveit(PointB).Addthevalueoftheperpendicularline(B2A)tothepointatwhichthequalifiedbreakoutoccurs(PointC),whichresultsintheprojectedupsidetarget(PointD).04_Perl_ch04.indd998/08/57:36:52PM 100DeMarkIndicators■InitiationofaFreshLongPositionQualifierThreeAssumingabreakoutbarX,lookatthepricebarbeforetheTDSupplyLineupsideviolation(X21).1.Calculatethedifferencebetweenthatbar’scloseandthelowerofthatbar’sloworthepreviousbar’sclose(thecloseofX22),and2.AddthatvaluetothecloseofX21.IfTheresultingnumberisbelowtheTDSupplyLine,ThenBuyontheintrabarbreakoftheTDSupplyLine,expectingthemarkettocloseaboveit.ButifThenumberisabovetheTDSupplyLineresistance,ThenTheintrabarbreakisconsidereddisqualifiedandlesslikelytofollowthroughtothedownsideonaclosingbasis;thatis,youcanfadethemoveintrabar.■CalculatingtheObjectiveforaTDSupplyLineBreakTodeterminetheobjectiveforaqualifiedupsideviolation,1.identifythelowesttruelowbelowtheTDSupplyLine,anddrawaperpendicularlineuptothecorrespondingTDSupplyLineaboveit.2.Addthevalueoftheperpendicularlinetothepointwherethequalifiedbreakoutoccurred.Theobjectivewillremainintactunlessthemarkethasaqualifieddownsidebreakout—inwhichcasethesupply/demanddynamicswillhaveshifted,ortheupsidetrendlinebreakouttargetwillhavebeenreached.HavingenteredalongpositionfollowingaqualifiedintrabarupsidebreakofaTDSupplyLine,youneedsomerulestogetyououtofthatpositionifthingsdon’tplayoutaccordingtoplan.■TDSupplyLineandExitingaLongPositionTherearethreeopportunitiesforclosingoutashorttradefollowinganunsuccessfulupsidebreakofaTDSupplyLine.1.iftheopenofthebarimmediatelyaftertheupsidebreakoutisbelowtheTDSupplyLinebreakoutlevel,exitattheopen.04_Perl_ch04.indd1008/08/57:36:53PM TDLines1012.iftheopenofthebarimmediatelyaftertheupsidebreakoutisbelowtheTDSupplyLine,andthebarclosesbelowtheTDSupplyLinebreakoutlevel,exitattheclose.3.ifthehighofthebarfollowingtheTDSupplyLinebreakfailstopostahigherhighthanthehighofthebreakoutbar,exitattheclose.Thisobjectiveapproachtotrendlineconstructionprovesthatyoucanremovesubjectivedirectionalbiasesfromthedecision-makingprocess.ApplyingdefinitiverulestotheidentificationofTDDemandPointsandTDSupplyPoints,determiningwhetherbreakoutsarequalifiedordisqualified,andhavingaclearmethodologyfordeterminingTDLinebreakouttargetsshouldhelpyoutimethemarketandimproveyourtradingconsistency.Furthermore,sincethisapproachenablesyoutoactpreemptivelyintrabaraheadofaclosingbreak,itcan,overtime,reduceslippageontrades.(Bywayofanaside,somepeopleapplytrendlinestomomentumoscillators.UsingthelogicoutlinedhereforTDLines,youcanexperimentwithapplyingTDLinestooverbought/oversoldindicators,todeterminequalified/disqualifiedbreaksandprojectionsforqualifiedbreakouts.Sincemomentumisaderivativeofprice,ideallyyouwouldwanttoseeapriceandmomentumtrendlinesimultaneouslygivingwayfromoverbought/oversoldterritory.)tDLines:recommendedSettings04_Perl_ch04.indd1018/08/57:36:54PM 102DeMarkIndicators04_Perl_ch04.indd1028/08/57:36:54PM chapter5TDRetracementsAswiththeconstructionoftrendlines,theapplicationofFibonacciretracementlevelsisahighlysubjectiveprocess.Traderswillinvariablyselecthighsandlowsbasedonwhattheyperceivetobecriticalpricelevels,andsoitishardlysurprisingthatdifferentpeaksandtroughshavevariousimportance,dependingontheroleofthemarketparticipants.DeMarkfoundthatthemostobjectivewaytodeterminewhichreferencehightousewhenprojectingretracementsfromareferencelowwastodeterminewhenthemarketlasttradedatthereferencelow,andthenchoosethehighestpointbetweenthetwolows.Conversely,todeterminewhichreferencelowtousewhenprojectingretracementsfromareferencehigh,determinewhenthemarketlasttradedatthereferencehigh,andselectthelowestpointbetweenthetwohighs.DeMarkreferstothismethod,aswellasitsassociatedratios0.382and0.618,TDMagnetPrice,andassociatedratios1.382,1.618,2.236,and2.618asTDRelativeRetracement(Figures5.1and5.2).■DeterminingReferencesforProjectingTDRelativeRetracementsIfyou’reanticipatingadownmovesubsequenttoarally,1.Calculatethedifferencebetweenthereferencehighandreferencelow;2.Multiplythatnumberby0.382and0.618,and3.Subtracttheresultingvaluesfromthereferencehigh.10305_Perl_ch05.indd1038/08/57:37:28PM 104DeMarkIndicatorsZ1.2600XReferencehighis1.2469.Lasttimethemarketwasequallyashighorhigher1.25001.2400(0.382)1.231.2300(0.618)1.221.22001.2100(Magnet)1.201.2000Referencehighis1.2469.1.1900Y(1.382)1.18Z–(Z–Y)*1.3821.1800Feb15Feb28Mar15Mar30Apr16Apr30May15May31Jun15Jun29Jul16Jul31Aug15Aug31Figure5.1DownsideTDRelativeRetracementinthedailychartofuSDCHF,thedownsideTDrelativeretracementlevelsarecalculatedbydeterminingwhenthemarketlasttradedabovethereferencehigh,thenselectingthelowestpointbetweenthetwohighs.TheresultingvalueisthenmultipliedbyFibonacciratios,0.382and0.618,1.382,andsoforth.Theresultsarethensubtractedfromthereferencehigh.inthisinstance,thehighreferencepriceis1.2469onJune14,2007.ThelasttimethemarketwasequallyashighorhigherisFebruary14,2007.ThelowestpointinbetweenisonApril25.Notehowthe1.382projectionofthatmovecutsinat1.1816.ThelowonAugust8is1.1817,beforethemarketbouncesto1.2215.Ifyou’reexpectinganupmovesubsequenttoadecline,1.Calculatethedifferencebetweenthereferencelowandreferencehigh;2.Multiplythatnumberby0.382and0.618,and3.Addtheresultingvaluestothereferencelow.Ifthemarketclosesabovethe0.382retracement,there’sareasonablechancethatitwillextendtothe0.618retracementlevel.Ifitclosesabovethe0.618retracementlevel,it’slikelythatthemarketwillextendevenhigher,totheTDMagnetPrice.TheTDMagnetPriceisimportant,becausemostpeopleconcentratetheirattentiononthe1.00retracement,thatis,theextremehighorlowofthereferencelevel—oncethe0.618levelisbreached.05_Perl_ch05.indd1048/08/57:37:32PM TDReTRacemenTs105Referencehigh170TDMagnetPriceis(Magnet)168.06thehighday’sclose.165(0.618)161.44160(0.382)156.79155150ReferencelowOct31Nov30Dec29Jan31Feb28Mar30Apr30May31Jun29Jul31Aug31Sep28Oct31Nov30Dec3120062007Figure5.2UpsideTDRelativeRetracementLevelsinthedailychartofeurJPY,theupsideTDrelativeretracementlevelsarecalculatedbydeterminingwhenthemarketlasttradedbelowthereferencelow,andthenselectingthehighestpointbetweenthetwolows.Theresultingvalueismultipliedby0.382and0.618,andtheresultsarethenaddedtothereferencelow.NotehowtheTDMagnetPrice(thecloseofthehighreferenceday)providesresistanceonanumberofoccasions.DeMark’sresearch,however,suggeststhatpricesareinsteadoftendrawntothereferencehighbar’scloseorthereferencelowbar’sclose,ratherthantheintrabarpriceextreme.ItisbecausepricesaredrawntothecloseofthereferencehighorreferencelowthatDeMarkreferstothislevelastheTDMagnetPrice.Heconcludedthat,moreoftenthannot,pricesrespondtothislevel,ratherthantothereferencehighorreferencelow.FailureattheTDMagnetPricetendstoleadtoaresumptionofthebroadertrend,whileasuccessfulbreakoftheTDMagnetPricetendstoleadtoaviolationofthereferencehighorreferencelow,whereasasuccessfulbreakattheTDMagnetPricewilloftenresultinanextensiontothe1.382level.IfyouapplythesamequalifiersasthoseyouusewithTDLines(withadashedretracementlinerepresentingadisqualifiedlevel,andasolidline,aqualifiedlevel),andifanyofthefollowingthree05_Perl_ch05.indd1058/08/57:37:36PM 106DeMarkIndicatorsconditionsissatisfied,thenanintrabarupsideviolationofaTDRelativeRetracementlevelisconsideredvalid,andthelikelihoodofacloseabovetheTDRelativeRetracementlevelisincreased.■ThreeConditionsforValidatingaTDRelativeRetracementLevel:OnlyOneNeedsToBeSatisfiedforaQualifiedBreakConditionOne:ThecloseofthepricebaronebarbeforeanintrabarupsidebreakofaTDrelativeretracementlevelmustbebelowtheclosingpricetwobarsbeforetheintrabarupsidebreak.ConditionTwo:ifconditiononeisn’tsatisfied,thenaqualifyingbreakcanstilloccur,ifthemarketopensaboveaTDrelativeretracementlevelandthentradesonetickabovetheopen.ConditionThree:ifthedifferencebetweenthecloseofthebarpriortotheupsidebreakanditstruelow(thelesserofthatbar’sloworthepreviousclose)iscalculated,andvalueofthecloseofthepricebarprecedingtheupsidebreakisaddedtothat,theresultmustbelessthantheTDrelativeretracementlevel.IfConditionOneissatisfied,traderscantheninitiatelongpositionsatthetimeofthebreak,ratherthanwaitingforabullishconfirmationattheclose.Therationaleisthat,ifthemarketclosedlowerbeforetheupsidebreak,tradersdidnotanticipateanadvanceandwerethereforenotpositionedforit.Theymightevenhavebeenshort—whichwouldhaveimprovedtheprobabilityofupsidefollow-throughintotheclose.ThesortofpriceactionofConditionTwosuggeststhatthesupply/demanddynamichasshiftedinfavorofbullsandthatrenewedbuyingactivitywillincreasethechancesofacloseabovetheupsideTDRelativeRetracementlevel.IntheeventthatneitherConditionOnenorTwoissatisfied,ConditionThree,whichmeasuresbuyingpressureaheadoftheTDRelativeRetracementlevel,maybeapplied,todeterminewhetherornotasuccessfulclosingbreakislikely.TherationaleforapplyingConditionThreetoqualifytheupsidebreakoutisthatbuyingpressureonthebaroftheupsidebreaknotonlyexceededdemandfromthepreviousbar,butalsowassufficienttoovercometheTDRelativeRetracementlevel.Wenowknowwhatconditionsneedtobefulfilledtoqualifyanintrabarbreak,butwhatshouldyoudoifthemarketfailstofollow05_Perl_ch05.indd1068/08/57:37:36PM TDReTRacemenTs107throughtotheupside,asoriginallyanticipated?AswithTDLines,DeMarkdevelopedasetofcontingencycriteriathatwouldinvalidateanupsidebreakofaTDRelativeRetracementlevel.■ConditionsThatInvalidateanUpsideBreakofaTDRelativeRetracementLevelConditionOne:iftheopenofthepricebarfollowingaqualifiedupsidebreakisbelowtheTDrelativeretracementlevel,exitthelongpositionontheopen.ConditionTwo:iftheopenofthebarfollowingaqualifiedupsidebreakisbelowthecloseofthebreakoutbar,andthenitclosesbelowtheTDrelativeretracementlevel,exitthelongpositionontheclose.ConditionThree:ifthehighofthebarfollowingthequalifiedupsidebreakisbelowthehighofthebreakoutbar,exitthelongpositionontheclose.Ifanyoneofthefollowingthreeconditionsissatisfied,thenanintrabardownsideviolationofaTDRelativeRetracementlevelisconsideredvalid,andthelikelihoodofacloseabovetheTDRelativeRetracementlevelisincreased.(Seethetextbelowforfurtherexplanation.)■ConditionsThatQualifyaDownsideBreakofaTDRelativeRetracementLevelConditionOne:ThecloseofthepricebaronebarbeforeanintrabardownsidebreakofaTDrelativeretracementlevelmustbeabovetheclosingpricetwobarsbeforetheintrabardownsidebreak.ConditionTwo:Assumingconditiononeisn’tsatisfied,aqualifyingbreakcanstilloccurifthemarketopensbelowaTDrelativeretracementlevelandthentradesonetickbelowtheopen.ConditionThree:Tomeasuresupply,calculatethedifferencebetweenthecloseofthebarpriortothedownsidebreakanditstruehigh(thegreaterofthatbar’shighorthepreviousclose),andsubtractthatvaluefromthecloseofthepricebarprecedingthedownsidebreak.TheresultmustbegreaterthantheTDrelativeretracementlevel.AssumingConditionOneoccurs,traderscaninitiateshortpositionsatthetimeofthebreak,ratherthanwaitingforabearishconfirmationonaclosingbasis.Therationaleforthisactionisthat,ifthemarketclosedhigherbeforethedownsidebreak,thentradersmustnothave05_Perl_ch05.indd1078/08/57:37:37PM 108DeMarkIndicatorsbeenanticipatingadeclineandwerethereforenotpositionedforit.Theymightevenhavebeenlong—therebyimprovingtheprobabilityofdownsidefollow-throughintotheclose.ThesortofpriceactionofConditionTwosuggeststhesupply/demanddynamichasshiftedinfavorofbearsandthatrenewedsellingactivityhasincreasedthechancesofaclosebelowthedownsideTDRelativeRetracementlevel.IntheeventthatneitherConditionOnenorTwoissatisfied,thisthirdcondition,whichmeasuressellingpressureaheadoftheTDRelativeRetracementlevel,maybeappliedtodeterminewhetherornotasuccessfulclosingbreakislikely.WithConditionThree,therationaleforthedownsidebreakouttobeconsideredvalidisthatsellingpressureonthebarofthedownsidebreaknotonlyexceededsupplyfromthepreviousbar,butwasalsosufficienttoovercometheTDRelativeRetracementlevel.■ToExitaShortPositionAfteraQualifiedDownsideBreakofaTDRelativeRetracementLevelConditionOne:iftheopenofthepricebarfollowingaqualifieddownsidebreakisabovetheTDrelativeretracementlevel,exityourshortpositionontheopen.ConditionTwo:ifthebarfollowingaqualifieddownsidebreakopensabovethecloseofthebreakoutbar,andthenclosesabovetheTDrelativeretracementlevel,exityourshortpositionontheclose.ConditionThree:ifthelowofthebarfollowingthequalifieddownsidebreakisabovethelowofthebreakoutbar,exityourshortpositionontheclose.tDrelativeretracement:recommendedSettings05_Perl_ch05.indd1088/08/57:37:39PM TDReTRacemenTs109Lookingfurtherintoretracements,DeMarkobservedthatifthemarketviolatesthe0.382percentupsideTDRelativeRetracementlevelintrabar,butclosesbelowit,thenoneofthreescenariosislikely:■MoreRetracementScenariosUpsideViolations1.ifthecloseofthebreakoutbarisbelowthecloseofthepriorbar,thenupsidepotentialisprobablyexhaustednearterm.2.ifthecloseofthebreakoutbarishigherthanthecloseofthepriorbar,thenthenextkeyretracementlevelishalfthedistancebetweenthe0.382and0.618levels;or3.iftheupsidefailurehappensaheadofthe0.618level,thenthenextkeyretracementlevelisthemidpointofthe0.618levelandtheTDMagnetPrice.Ifthemarketviolatesthe0.382percentupsideTDRelativeRetracementlevelintrabar,butclosesaboveit,thenoneoftwoscenariosislikely:■RetracementScenariosDownsideViolations1.ifthebreakoutbar’scloseisabovethecloseofthepriorbar,thendownsidepotentialisprobablyexhaustednearterm.2.ifthecloseofthebreakoutbarislowerthanthepriorbar’sclose,thenthenextkeyretracementlevelishalfthedistancebetweenthe0.382and0.618levels;or3.ifthedownsidefailurehappensaheadofthe0.618level,thenthenextkeyretracementlevelisthemidpointofthe0.618levelandtheTDMagnetPrice.DeMarkalsomentionsthatanotherpricepatternshouldbewatched:Whenabarexceedstworetracementlevelsoneithertheupsideorthedownsideinthesameperiod,themarketoftenreversescourseor,atleast,consolidates.■AnotherReversal/ConsolidationPattern1.ifthemarketopensbelowoneretracementlevelandthenmovesabovebothitandtheretracementlevelaboveit;or2.ifthemarketopensabovearetracementlevelandthentradesbelowbothitandtheretracementlevelbeyondthat,thisoftencoincideswithnear-termpriceexhaustion.TDRelativeRetracementsareveryhelpfulwhenyoucanreferenceapriorhighorlow,butwhatdoyoudowhenthemarketis05_Perl_ch05.indd1098/08/57:37:40PM 110DeMarkIndicators14000(1.618)13190.2013000(1.500)12228.2412000(1.382)11266.29110001000090008000Mar28Jun27Sep26Dec26Mar26Jun25Sep24Dec31Mar25Jun24Sep3020032004Figure5.3UpsideTDAbsoluteRetracementintheweeklychartoftheNikkei225(basiscash),notehowthemarketbouncessharplythefirsttimeitteststheupside0.382TDAbsoluteretracementlevelprojectedfromtheFebruary2003low.interestingly,the0.50levelalsoprovidesstiffresistancefortheeighteenmonthsafteritisfirsttested.tradingathistorichighsorlowsandthereisnopriorreferencelevel?DeMarkalsohasanapproachforthissituation.HecallsitTDAbsoluteRetracement(Figures5.3and5.4).■TDAbsoluteRetracementToprojectdownsidelevels,multiplythehighbyafactorof0.382and0.618,andToprojectupsidelevels,multiplythelowbyafactorof0.382and0.618.recommendedSettingsfortDabsoluteretracement05_Perl_ch05.indd1108/08/57:37:44PM TDReTRacemenTs1111600150014001300120011001000(0.618)943.97900(0.500)763.73800700DecMarJunSepDecMarJunSepDecMarJunSepDecMarJunSepDecMarJunSep313130292930292828292827272827262626252419992000200120022003Figure5.4DownsideTDAbsoluteRetracementintheweeklychartoftheS&P500(basiscash),notehowthemarketbouncessharplythefirsttimeitteststhedownside0.618TDAbsoluteretracementlevelprojectedofftheMarch2000high.interestingly,italsobouncessharplyinApril2002offthe0.50level.Upuntilnow,we’vefocusedonlyonretracementsofprice,but,indoingso,we’veoverlookedanimportantfactor—retracementsoftime.DeMarkcallshisresponsetothisissueTDRetracementArc.Combiningpriceandtimeaddsanextradimensiontotheanalysis.Initially,DeMarkstruggledwiththescaleissue:Everytimeachartwasresized,itproduceddifferentretracementlevels.ThesolutionwastoanchorthepointoforiginusedintheconstructionoftheTDRetracementArc(Figures5.5and5.6).■ConstructingtheTDRetracementArcforUpsideRetracementsifyoubelievethemarketisbasing,1.Drawadiagonallineoriginatingfromyourchosenreferencelowtothehighesthightradedsincethemarketlasttradedbeneaththereferencelow;2.Calculatethe0.382and0.618retracementsofthehightothelowonthatdiagonalline;and3.Projectthe0.382and0.618levelsforward,usingthereferenceoriginasthepivotlevel.05_Perl_ch05.indd1118/08/57:37:48PM 112DeMarkIndicators160000ReferencehighMagnet1575001550000.6181525001500000.382147500145000142500Pivotpoint140000137500135000133061132500130000AugSepOctNovDec2008127500230106132027041017240108152229051219260310172402071422283001Figure5.5UpsideTDRetracementArcThedailychartoftheS&P500(basiscash)illustratesanupsideTDretracementArc.Thearcisconstructedafteridentifyingthelasttimethemarkettradedbelowtheexpectedreferencelowandthehighestpointbetweenthosetwolows.usingthereferencelowasthepivot,the0.382and0.618retracementsofthatmoveareprojectedforward.Notehowthe0.618levelcoincideswiththereversalthatoccursonDecember11,2007.Source:CQginc.©2008.Allrightsreservedworldwide.www.cqg.com.■ConstructingtheTDRetracementArcforDownsideRetracementsifyoubelievethemarketistopping,1.Drawadiagonallineoriginatingfromyourchosenreferencehightothelowestlowtradedsincethemarketlasttradedabovethereferencehigh;2.Calculatethe0.382and0.618retracementsofthelowtothehighonthatdiagonalline;and3.Projectthe0.382and0.618levelsforward,usingthereferenceoriginasthepivotlevel.Developingthetimeaspectastepfurthershowsittobeausefulwaytocorroborateexpectedstrengthorweakness.DeMarknotes05_Perl_ch05.indd1128/08/57:37:50PM TDReTRacemenTs1131900000185000018000001750000170000016500001600000155000015000000.38214500001400000135000013000000.61812500001200000Dec2007FebMarAprMayJunJulAugSepOctNovDec2008061320011118250415220119011226020916230114210111182502092301132027031018011522011226031017042128Figure5.6DownsideTDRetracementArcThedailychartoftheNikkei225(basiscash)illustratesadownsideTDretracementArc.Thearcisconstructedafteridentifyingthelasttimethemarkettradedabovetheexpectedreferencehighandthelowestpointbetweenthosetwohighs.usingthereferencehighasthepivot,the0.382and0.618retracementsofthatmoveareprojectedforwardintothefuture.Notehowthe0.618levelprovidesstrongsupportinmid-August2007.Source:CQginc.©2008.Allrightsreservedworldwide.www.cqg.com.that,if,forexample,themarketcanretrace0.382ofapricemovein0.382oftheamountoftimethattheoriginalmovetooktounfold,thenthereisanincreasedprobabilitythatthemarketwillgettothe0.618priceprojection.AswithalltheDeMarkindicators,youcanapplythisapproachtoretracementstoanymarketortimeframe,andsoitisworthlookingatanumberofdifferentinstrumentsandtimeframes,toseeifthereisaconfluenceoflevelsandalignment,suchasa0.382retracementinalonger-termtimeframe,witha0.618retracementinashorter-termtimeframe.Furthermore,youcanapplytheTDRelativeRetrace-ment,TDAbsoluteRetracement(Figure5.7),andTDRetracementArctofunctionsotherthanprice.Consider,forexample,applying05_Perl_ch05.indd1138/08/57:37:54PM 114DeMarkIndicators40(3.618)38.353530(2.618)27.752520(1.618)17.15(1.500)15.90(1.382)14.651510Nov30Dec29Jan31Feb28Mar30Apr30May31Jun29Jul31Aug31Sep28Oct31Nov30Dec31Jan3120062007Figure5.7AnUpsideTDAbsoluteRetracementThedailychartoftheViXindexillustratesanupsideTDAbsoluteretracement.Notehowthe3.618levelcapsthelasttwosharpmoveshigherinAugust2007andJanuary2008.Source:CQginc.©2008.Allrightsreservedworldwide.www.cqg.com.themtoimpliedoptionvolatility,theVIX,ortheUBSFXRiskIndex(whichmonitorsinvestorappetiteforrisk-aversionandriskseekingbehavior).05_Perl_ch05.indd1148/08/57:37:57PM chapTer6TDTrendFactorandTDPropulsionTDTrendFactorSinceI’vealwaysbeenintriguedbypriceratiosandrelationshipsthattrytopredictwheremarketsarelikelytoencounterbuyinginterestorsellinginterest,DeMark’sTDTrendFactorhasalwaysheldafascinationforme.Theindicatorisolatesqualifiedhighs,lows,andcloses,andmultipliesthosevaluesbyaseriesofpredefinedratiosinordertoidentifyprospectivesupportandresistancelevels.UsedinconjunctionwithotherTDstudies,TDTrendFactorisahelpfultoolfordefiningpotentialexhaustionlevelsorforcalculatingtargetswhenanexpectedpricereversalisunderway.ManytechnicalanalystsaskhowDeMarkcameupwiththenumbersequencesandratiosthatheuses.Moreoftenthannot,theywereby-productsofextensiveandobsessive-compulsiveexperimentationwithFibonaccinumbers.ThetwomostcommonlyusedFibonacciratiosare0.382and0.618.DeMarksubtractedtheformerfromthelatter,tookthe0.236result,anddividedthatbyfour.(ItisDeMark’scontentionthatmarketmovescanbesubdividedintoaseriesofdirectionallegsandthattheinceptionofalegisoftenprecededbyamoveofapproximately25percentofthepriorleg(seethesection“TDPropulsion”forfurtherdetails).Althoughthenumber0.236dividedby4is0.059,afterrigoroustestinginawidevarietyofmarkets,DeMarkconcludedthat0.0556wasamoreaccurateandreliableratiotouseforpriceprojections.Additionalupsideordownsidelevelsareidentifiedbyaseriesof0.0556multiples.Whatdoyoudowithmarkets,suchasforex(FX),thatmoveinsmallpriceincrements,whichareoftenquotedtofourdecimalplaces?11506_Perl_ch06.indd1158/08/57:39:06PM 116DeMarkIndicatorsThesolutionistoaddanextradecimal,sothattheupsideratiois1.00556,whilethedownsideratiois0.99444.Althoughafactorof0.0556isusedinupsidecalculations,thedownsideprojectionsarederiveddifferently,sinceeachTDTrendFactorlevelisusedtodeterminethenextone(wherebyeachvalueismultipliedby0.9444forlargervalues,or0.99444,forsmallervalues).Weuse5.556percentastheratioforupsidemoves,while94.44percentisusedasthemultiplierfordownsidemoves(comparedwith0.5556percentand0.9944percent,respectively,forsmallervalues).AsistruewithalltheDeMarkindicators,specificsetsofrulesqualifyahigh,low,orclosefromwhichtoprojectdownsideorupsideTDTrendFactorlevels(Figures6.1,6.2,and6.3).nToDetermineaTopfromWhichtoCalculateDownsideTDTrendFactorLevelsAfterthemarkethasadvancedbyatleast5.556percentfromapreviouslow,comparethecloseofthehighbarwiththecloseofthepreviouspricebar.14.5013.9314.0013.5013.1513.0012.4212.5012.0011.73Jan5Jan15Jan22Jan31Feb7Feb14Feb21Feb28Mar8Mar15Mar23Mar30Apr9Apr16Apr23Figure6.1ProjectingDownsideTDTrendFactorLevelsinthedailychartofsilver(basiscash),silveradvancesbymorethan5.556percentfromapriorlow,andwecanprojectdownsideTDTrendFactorlevels.SincethecloseofthehighbarfromFebruary26,2007,isabovethecloseofthepriorpricebar,thefirstdownsideprojectionisbasedonthehighofthehighbar,andallsubsequentlevelsarecalculatedfromthehighofthehighbar.NotehowthemarketbouncesabruptlyafteritreachesthethirddownsidelevelonMarch5,2007.06_Perl_ch06.indd1168/08/57:39:10PM 155015001467.9814501405.701400Aug15Aug31Sep14Sep28Oct15Oct31Nov15Nov30Dec14Figure6.2ProjectingDownsideTDTrendFactorLevelsinthechartoftheS&P500(basiscash),theindexadvancesbymorethan5.556percentfromapriorlow,andwecanprojectdownsideTDTrendFactorlevels.Sincethecloseofthehighbarisbelowthecloseofthepriorpricebar,thefirstdownsideprojectionisbasedonthecloseofthehighbar,andallsubsequentlevelsarecalculatedfromthehighofthehighbar.NotehowtheseconddownsidelevelprovidessupportonNovember26,2007.14.5013.9314.0013.5013.1513.0012.4212.5012.00Jan5Jan15Jan22Jan31Feb7Feb14Feb21Feb28Mar8Mar15Mar23Mar30Apr9Apr16Figure6.3ProjectingDownsideCoincidentwithTDDifferentialinthedailychartofsilver(basiscash),thefailureatthethirdTDTrendFactorlevelcoincideswithaTDDifferentialbuysignal,whichindicatesupwardpressure.11706_Perl_ch06.indd1178/08/57:39:13PM 118DeMarkIndicatorsIfThecloseofthehighbarisabovethecloseofthepreviouspricebar,ThenThedownsideTDTrendFactorprojectionshouldbeanchoredatthehighofthehighbar.ButifThecloseofthehighbarcloseisbelowthecloseofpreviouspricebar,ThenThedownsideTDTrendFactorprojectionshouldbeanchoredatthecloseofthehighbar.NotethatthefirstdownsideTDTrendFactorlevel(whichistakenfromeitherthehighorthecloseofthehighbar)projectsdownbyaratioof0.9444,butthatallsubsequentdownsideTDTrendFactorlevelsareprojectedfromthepeakofthehighbar’speak.nToDetermineaBottomfromWhichtoCalculateUpsideTDTrendFactorLevelsAfterthemarkethasdeclinedbyatleast5.556percentfromaprevioustop,comparethecloseofthelowbarwiththecloseofthepreviouspricebar.IfThecloseofthelowbarisbelowthecloseofthepreviouspricebar,ThenTheupsideTDTrendFactorprojectionshouldbeanchoredatthelowbar’slow.ButifThecloseofthelowbarisabovethecloseofthepreviouspricebar,ThenTheupsideTDTrendFactorprojectionshouldbeanchoredatthecloseofthelowbar.NotethatthefirstupsideTDTrendFactorlevel(whichistakenfromeithertheloworthecloseofthelowbar)projectsupbyamultipleof1.0556,butallsubsequentupsideTDTrendFactorlevels(Figures6.4,6.5,and6.6)areprojectedfromthetroughofthelowbar.06_Perl_ch06.indd1188/08/57:39:14PM 14.1614.0013.4813.5013.0012.8112.5012.0011.5011.00Jun7Jun15Jun22Jun29Jul9Jul16Jul23Jul31Aug8Aug15Figure6.4ProjectingUpsideTDTrendFactorLevelsThedailychartshowsthatsilverdeclinesbymorethan5.556percentfromapriorhigh,andwecanprojectupsideTDTrendFactorlevels.Sincethecloseofthelowbarisbelowthecloseofthepriorpricebar,thefirstupsideprojectionisbasedonthelowofthelowbar,andallsubsequentlevelsarecalculatedfromthelowofthelowbar.NotehowthemarketsellsoffsharplyafterhittingthesecondTDTrendFactorlevel.14.7414.5014.0714.0013.4013.5013.0013.0012.5012.00Nov30Dec8Dec15Dec22Dec29Jan8Jan15Jan23Jan31Feb7Feb14Feb21Feb28Mar82006Figure6.5ProjectingUpsideTDTrendFactorLevelsinthedailychart,silver(basiscash)declinesbymorethan5.556percentfromapriorhigh,andwecanprojectupsideTDTrendFactorlevels.inthisinstance,sincethecloseofthelowbaronJanuary8isabovethecloseofthepriorpricebar,thefirstupsideprojectionisbasedonthecloseofthelowbar,andallsubsequentlevelsarecalculatedfromthelowofthelowbar.NotehowthefourthupsideprojectionrebuffstheadvanceonFebruary26,2007.11906_Perl_ch06.indd1198/08/57:39:19PM 120DeMarkIndicators15.0014.7414.5014.0714.0013.4013.5013.0013.0012.5012.00Nov30Dec8Dec15Dec22Dec29Jan8Jan15Jan23Jan31Feb7Feb14Feb21Feb28Mar82006Figure6.6ProjectingUpsideTDTrendFactorLevelsinthedailychartofsilver(basiscash),thefailureatthefourthTDTrendFactorlevelcoincideswithtwoconsecutiveclosesoutsideTDChannelii(seeChapter9),whichindicatesdownsidevulnerability.FrequentlyaskedQuestionsIsthereasetofconditionsIcanusetoqualifyTDTrendFactorviolations?Yes,youcanusethesamethreecriteriathatdefineaqualified/disqualifiedTDLineorTDRetracementbreak.CanIuseTDTrendFactorinconjunctionwithotherTDindicators?Yes,youcan,andyoushould.Ifyouhaveaconfluenceofsignals,usingTDindicatorstogetherisinvariablymorepowerfulandhasagreaterprobabilityofworking—particularlyifitcoincideswithaTDChannel,TDSequential,TDCombo,orTDD-Wavesignal,oriftheTDTrendFactorlevellinesupwithaTDRetracementand/oraTDPropulsionlevel.ArethereanyotherinterestingthingsIcouldexperimentwith,withtheDeMarkindicators?Yes,youcantrytoapplyTDTrendFactortoTDSetupranges.06_Perl_ch06.indd1208/08/57:39:21PM TDTrenDFacToranDTDProPulsion121TDTrendFactor–recommendedSettingsTDpropulsionTDPropulsionhasanumberofusefulfacets,whichmakeitaninterestingindicator.Inadditiontoidentifyingprospectiveprice-exhaustionlevels,italsohighlightstrendsinprogress.Itoperatesonthepremisethat,ifamarketrallies,pullsback,andthenresumesitsuptrendwithouthavingviolatedtheoriginoftheadvance,youcanidentifyabulltriggerthatshouldprovidethecatalystforanextensiontoahighertargetlevel.Conversely,ifamarketdeclines,rallies,andthenresumesitsdowntrendwithouthavingviolatedtheoriginofthedecline,youcanidentifyabeartriggerthatshouldprovidethecatalystforanextensiontoalowertargetlevel.Theindicatorhastwocomponents:primarylevels,referredtoasTDPropulsionUpandTDPropulsionDownentrypoints,andsecondarylevels,knownasTDPropulsionUpTargetandTDPropulsionDownTarget.Theprimary(thrust)levelsserveastriggersforextendedmovesinthedirectionofthetrendtowardthesecondary(exhaustion)levels.DefiningtheinitialthrustlevelproperlyiscrucialtotheconstructionofTDPropulsion.Todothatproperly,youneedtoconsiderpriceactionleadinguptoandsubsequenttotheprimaryadvance.Boththepricedeclineleadinguptoaprospectiveprimaryupthrustandthesubsequentsetbackneedtobetakenintoconsideration—andthesemovesarevalidatediftheysatisfyaminimumpercentagerequirement.06_Perl_ch06.indd1218/08/57:39:24PM 122DeMarkIndicatorsnDefiningtheInitialThrustLevelforanAdvanceCalculatethedifferenceinpricebetweenthepricelowofthemoveupatpointXandthepricehighforthemovesofaratpointY.IfThesell-offfromtheclosesofthehighbarsleadinguptopointsXandZare23.6percentormoreofthedifferencebetweenXandY,Then1.PointsXandZarecorrectlyidentified;2.TheinitialupthrustfromZtoAis23.6percentoftherallyfromXtoY,thatvalueisaddedtothelowatZ,and3.TheupsidepricetargetforBisdoublethepercentage(2323.6percent),or47.2percent.nDefiningtheInitialThrustLevelforaDeclineCalculatethedifferenceinpricebetweenthepricehighofthemovedownatpointXandthepricelowforthemovesofaratpointY.IfTheadvancefromtheclosesofthelowbarsleadinguptopointsXandZare23.6percentormoreofthedifferencebetweenXandY,Then1.PointsXandZarecorrectlyidentified,2.TheinitialdownthrustfromZtoAis23.6percentofthedeclinefromXtoY,thatvalueissubtractedfromthehighatZ,and3.ThedownsidepricetargetforBisdoublethepercentage(2323.6percent),or47.2percent.Notethat,ontheBloombergterminal,thedefaultsettingsforTDPropulsionaresettothemoreconservative25percentand50percentthresholds,ratherthan23.6percentand47.2percent,respectively.MoreconservativetradersmaywishtoapplyoneofthethreeTDLinequalificationcriteriatodeterminewhetherthemarket,figurativelyspeaking,isanticipatingabreakout.IfoneofthequalifiersissatisfiedpriortoclearingaTDPropulsionUporaTDPropulsionDownlevel,thentheprobabilityoffollow-throughinthedirectionofthebreakisincreased(Figures6.7and6.8).06_Perl_ch06.indd1228/08/57:39:24PM TDTrenDFacToranDTDProPulsion123YB117.88118.00A116.00Upsideexhaustionlevel114.00Upside133.99Zthresholdlevel112.00110.00Upsidethreshold=113.99+((117.88–109.00)*0.236)109.00Upsideexhaustion=113.99+((117.88–109.00)*0.472)X108.00Apr28May15May31Jun15Jun30Jul14Jul31Aug15Aug31Sep15Sep29Figure6.7TheTDPropulsionUpLevelinthedailychartofuSDJPY,calculatethedifferenceinpricebetweenthepricelowatpointXandthepricehighatpointY.Aslongasthesell-offsfromtheclosesofthehighbarsleadinguptopointsXandZare23.6percentormoreofthedifferencebetweenXandY,thenpointsXandZarecorrectlyidentified.TheensuingupmoveoffZencountersresistanceatA,theTDPropulsionuplevel(upsidethresholdlevel).Oncethemarketovercomesthatlevel,thethrustprovidesthecatalystforanextensiontoB(upsideexhaustionlevel).TheinitialadvancefromZtoAis23.6percentoftherallyfromXtoY,andthatvalueisaddedtothelowatZ,whileBisdoublethepercentage(23.6)at47.2percent.TDpropulsion:recommendedSettings06_Perl_ch06.indd1238/08/57:39:28PM 124DeMarkIndicatorsXDownsidethreshold=119.40–((121.40–113.43)*0.236)122.00121.40Downsideexhaustion=119.40–((121.40–113.43)*0.472)121.00Z120.00Downside119.40thresholdlevel119.00118.00A117.00116.00B115.00Downside114.00113.43exhaustionlevelY113.00Nov15Nov30Dec15Dec30Jan16Jan31Feb14Feb28Mar15Mar312005Figure6.8inthedailychartofuSDJPY,calculatethedifferenceinpricebetweenthepricehighatpointXandthepricelowatpointY.AslongastheadvancefromtheclosesofthelowbarstopointsXandZare23.6percentormoreofthedifferencebetweenXandY,thenpointsXandZarecorrectlyidentified.TheensuingdownmovefrompointZencounterssupportattheTDPropulsionDownlevel(downsidethreshold).Oncethemarketviolatesthatlevel,thethrustprovidesthecatalystforanextensiontothedownsideexhaustionlevel.TheinitialdeclinefromZtoAis23.6percentofthedeclinefromXtoY,subtractedfromthehighatZ,whileBisdoublethatvalueat47.2percent.06_Perl_ch06.indd1248/08/57:39:31PM chapTER7TDOscillatorsTDRangeExpansionIndex(TDREI)Itneverceasestoamazemehowmanypeopleusetechnicalindicatorswithoutknowingtheformulasforthestudies.Ifyoudon’tbelieveme,takeaquickpopquiz:SeeifyoucanwritedownthecalculationfortheRelativeStrengthIndex(RSI),oneofthemostcommonlyusedoverbought/oversoldmomentumoscillators.Notaseasyasyouthought,right?nInCaseYouNeedPromptingontheRSI...Takethelastfourteenpricebarsandcomparethestrengthofupanddownmovesoverthatperiod.Byaveragingtheupanddownmovesbetweenbarsonaclosingbasis,yougetRelativeStrength(RS).ToconvertRStoindexformat(RSI)...RSI5100[100/11RS].Okay,soyourmemory’sfailing—youusedtoknowtheformulayearsago.Doesitreallymatterthatyou’veforgottenit,nowthatyou’reaseasonedtraderandyou’vebeenusingitforyears?Well,yes,itdoes,because,ifyoudon’tknowhowtheindicatorisconstructed,itisunlikelythatyouwillknowitsshortcomingsandwhenitismoreorlesslikelytoworkeffectively,underdifferentmarketconditions.12507_Perl_ch07.indd1258/08/57:40:26PM 126DeMarkIndicatorsManyofthemomentum-basedindicatorsincludedonchartingsystemsthesedaysarederivedexponentiallyratherthanarithmetically.Accordingly,largepricemovementshaveatendencytodis-torthistoricaldataandstudiesbasedonthatpriceaction(albeitlesssignificantlyasmoretimeelapses).Furthermore,becausemostchartbasedtechnicalindicatorsarederivedfromclosingprices,therelevanceofintrabartradingactivitybetweenhighsandlowsisoftenoverlooked.Manypeopleconcentrate—tooheavilyinmyopinion—onthenotionof“divergence”betweenpriceactionandmomentum,toidentifyprospectiveturningpointsintheestablishedtrend.Divergencemanifestsitselfwhenanextremepricehighorlowisnotmatchedbyacorrespondingextremeinmomentum.Whenbearishdivergenceoccursduringanuptrend,forexample,conventionalwisdomarguesthatpositivemomentum,thatis,theabilitytomaintainintrabargainsonaclosingbasis,mustbeonthewane,sinceupsidepressureisdissipating.Conversely,bullishdivergencebetweenpriceactionandmomentumisthoughttoexistwhenintrabarlossesarenotsustainedonaclosingbasis,implyingthatdownwardpressureonpricesisreceding.DeMarktakesissuewiththisinterpretationofmomentum,arguingthatmomentumdivergencesdon’thappenoften,but,whentheydo,it’sfairlycommonformultipledivergencestooccur.Thismakesitdifficulttodiscernwhenthreateningdivergencebetweenpriceactionandmomentumwilltriggerareversalinprice.(Forexample,takealookatthedailychartofgold,below(Figure7.1),whichhasafairlypronounceddivergencebetweenpriceandthefourteen-periodRSIforaprolongedperiodoftime,eventhoughthemarketremainedfirmlyentrenchedinanuptrend.)DeMarknotesthat,inadditiontomonitoringprice,weshouldpayattentiontotheamountoftimethatmomentumindicatorsspendinoverbought/oversoldterritory—aconcepthecallsdurationanalysis.Heobservesthatareadingofsixorfewerpricebars,ineitheroverboughtoroversoldterritory,ismild,irrespectiveofhowextremethatreadinghappenstobe.Anexcursionofmorethansixpricebarsintooverboughtoroversoldterritory,however,suggeststhatatrendisstrong.Refutingthewidelyheldnotionthatmarketsaremostsusceptibletoreversalswheninextremeoverbought/oversoldterritory,he07_Perl_ch07.indd1268/08/57:40:27PM TDOscillaTOrs127Last872.87Highon01/14/08914.30900Average771.96850Lowon08/16/07642.25800750700650TDREIstandard(5,6)–85.00100500–50–100RSIonclose(14)58.0880604020Aug15Aug31Sep14Sep28Oct15Oct31Nov15Nov30Dec14Dec31Jan152007FIguRe7.1DailyChartofGoldNotehowpronouncedbearishdivergencebetweenpriceactionandmomentumwasthroughouttheup-movebetweenSeptemberandOctober.furtherarguesthatreversalsaremostlikelytooccurfrommildlyoverbought/oversoldlevels.Ideally,extrememomentumreadingsneedtoreverttoneutrallevels,andthencorrectbacktowardmildlyoverboughtoroversoldterritory,beforeameaningfulreversalcanbegin.It’sthisinterplaybetweenextremeandmildmomentumreadingsthatproducesfailureswingsandleadspeopletobelieveindivergence.It’sallverywellbeingaback-seat,momentumdriver,yousay,butwhatdoesDeMarkhavetosayaboutmomentum?Henotesthat,althoughtherearenumerousfactorsinfluencingthemarketonadayto-daybasis,theeffectsofthosefactorssubsideovertime,andhedevelopedtheTDRangeExpansionIndex(TDREI),forjustsuchsituations(Figure7.2).Itissilentthroughoutstrongdirectionalmovesandneutralduringtradingranges;itis,inotherwords,responsivetoadvancesanddeclinesinprice.Theeffectsofsuddenpriceburststhatarenotsustainedformorethanonepricebarcanbemitigatedbyevaluatingtherelationshipbetweenthecurrentpricebarandthepricebartwobarsbeforeit.07_Perl_ch07.indd1278/08/57:40:31PM 128DeMarkIndicatorsLast241.77250Highon07/20/07251.11Average239.07245Lowon03/06/07221.13240235230225220TDREIstandard(5,6)–30.46100500–50–100RSIonclose(14)23.6880604020Mar15Mar30Apr16Apr30May15May31Jun15Jun29Jul16Jul31FIguRe7.2TDREIPriceFluctuationsNotehowinthedailychartofgBPJPYtheTDReIismuchmoreresponsivetopricefluctuationsthantheRSIis.WhiletheRSIremainsoverboughtduringtheuptrendfromFebruarythroughMay2007andagainfromJunethroughJuly,theTDReIprovidesabuyingopportunityinlateMarch,mid-May,mid-June,andlateJune.nTDREIFormulaCalculation:1.Addthedifferencebetweenthehighofthecurrentpricebarandthehightwobarsearliertothedifferencebetweenthelowofthecurrentpricebarandthelowtwobarsearlier.(Theresultcanbeeitheraboveorbelowzero,dependingonwhetherthecurrenthighandlowaregreaterthan,orlessthan,thehighorlowtwopricebarsearlierand,ifso,byhowmuch.)Analysis:Currentpriceactionisoverlappingearlierpriceaction,andthemarketsarenotexhibitingstrongdirectionaltendenciesifthefollowingoccurs:1.Thehighofthecurrentpricebarisgreaterthan,orequalto,thelowfiveorsixbarsearlier,orthehighoftwobarsagoisgreaterthan,orequalto,theclosesevenoreightbarsearlier;and2.Thelowofthecurrentpricebarislessthan,orequalto,thehighfiveorsixbarsearlier,orthehighoftwobarsagoislessthan,orequalto,theclosesevenoreightbarsearlier.07_Perl_ch07.indd1288/08/57:40:34PM TDOscillaTOrs129Ifeitheroneofthetwoqualifiersisnotsatisfied,however,thecorrespondingbarisassignedavalueofzero,insteadofthevaluethatwouldotherwisehavebeenassigned.Therationaleisthat,iftheseconditionsaren’tmet,themarketisprobablytrending,becausethecurrentpriceisn’toverlappingearlierpriceaction.Thezerovalue,therefore,reducestheriskthattheindicatorwillbecomeoverboughtoroversoldduringadirectionalmove,andthuspreventstradersfromcallingatoporbottomprematurelyduringastrongtrend.nToEstablishaValuefortheTDREI1.Addthedifferencebetweenthehighandlowforeachbarofafive-barperiod,2.Totalallthevalues,3.Dividetheresultbytheabsolutepricemoveoverthefive-barperiod(thatis,thedifferencebetweenthehighesthighandlowestlow),and4.MultiplythatresultbyonehundredtodeterminetheTDReI(whichcantradebetween2100and1100).ForidentifyingprospectivereversalsrelativetooverboughtandoversoldzonesfortheTDREI,DeMarkconsiders140and240tobetheidealparameters.WhentheTDREIisabove140forfewerthansixpricebars,andthenfallsback,that’sasignofweakness,andyoushouldexpectsomenear-termgains.Whenit’sbelow240forfewerthansixpricebars,andthenrecovers,that’sasignofstrength,andyoushouldbepreparedforashort-termrecovery.nUsingtheTDREItoIdentifyProspectiveReversalsWeakness:TDReIstaysabove140forfewerthansixpricebars,andthenfallsback.(Expectnear-termgains.)Strength:TDReIstaysbelow240forfewerthansixpricebars,andthenrecovers.(Expectshort-termrecovery.)Youcanaddafurtherfilter,theTDPriceOscillatorQualifier(TDPOQ),asameansoffilteringthesignalsgeneratedbytheTDREI.(Incidentally,youcanalsoapplythisfiltertootheroverbought/oversoldmomentum-basedoscillators.)07_Perl_ch07.indd1298/08/57:40:35PM 130DeMarkIndicatorsnUsingtheTDPOQtoFilterTDREISignalsFurtherToInitiateaBuySignal:1.TheTDReImustbebelow240forsixorfewerperiods;2.Theremustbealowerclosethanthecloseofthepriorpricebar;3.Theopenofthenextpricebarmustbelessthan,orequalto,thetwopriorpricehighs;and4.Themarketmusttradeabovetheopenandpostahighaboveeitheroneofthepriortwopricehighs.ToTriggeraSellSignal:1.TheTDReImustbeabove140forsixorfewerperiods;2.Theremustbeahigherclosethanthecloseofthepriorpricebar;3.Theopenofthenextpricebarmustbegreaterthan,orequalto,thetwopriorpricelows;and4.Themarketmusttradebelowtheopenandpostalowbeloweitheroneofthepriortwopricelows.Alsonoticethat,whentheTDREIisoverboughtformorethansixpricebarsandthengoesintooversoldterritoryforfewerthansixpricebars,itoftenprovidesanacuterisk/rewardbuyingopportunity.Conversely,whentheTDREIisoversoldformorethansixpricebarsandthengoesintooverboughtterritoryforfewerthansixpricebars,itoftenprovidesanacuterisk/rewardsellingopportunity,whenitexitsoverboughtterritorywithinsixbars(Figures7.3and7.4).nFortheMathematiciansLegend:H5Currentpricebar’shighH5Thehightwobarsago2L5Currentpricebar’slowL5Thelowtwobarsago2X5(H2H)1(L2L)22ConditionI:Thehighofthecurrentpricebarmustbegreaterthanorequaltothelowfiveorsixbarsearlier,07_Perl_ch07.indd1308/08/57:40:36PM 90858075Last76.8970Highon10/25/0485.8665Average71.97Lowon12/10/0461.5160TDREIstandard(5,6)0.00100500–50–100RSIonclose(14)36.4380604020Oct22Oct29Nov8Nov15Nov22Nov30Dec8Dec15Dec23Dec30Jan7Jan14Jan24Jan31Feb7Feb14Feb222004FIguRe7.3TDREIResponsivetoPriceFluctuationsNotehowinthedailychartofcrudeoil(WTI)theTDReIismuchmoreresponsivetopricefluctuationsthantheRSIwhenpricesaretrending.WhiletherearenoclearsignalsfromtheRSIbetweenOctoberandFebruary,theTDReIprovidesanumberofdirectionalopportunitiesthroughoutthattime.1.31001.30001.29001.28001.27001.26001.25001.2400100500–50–10080604020Jun30Jul7Jul14Jul24Jul31Aug8Aug15Aug23Aug31Sep8FIguRe7.4TDREIResponsivetoPriceFluctuationsInthedailychartofeuRuSD,theTDReIismuchmoreresponsivetopricefluctuationsthantheRSI,evenwhenpricesareconfinedtoranges.WhiletherearenoclearsignalsfromtheRSIbetweenJuneandSeptember,theTDReIprovidesanumberofdirectionalopportunitiesthroughoutthattime.13107_Perl_ch07.indd1318/08/57:40:42PM 132DeMarkIndicatorsOrThehighoftwobarsagomustbegreaterthanorequaltotheclosesevenoreightbarsearlier,andConditionII:Thelowofthecurrentpricebarmustbelessthan,orequalto,thehigheitherfiveorsixbarsearlier,OrThehighoftwobarsagomustbelessthanorequaltothecloseeithersevenoreightbarsearlier.Ifeitherconditionisnotsatisfied,avalueofzeroisassignedtothatbar.Ifbothconditionsaremet,thevalueforthatbaristhedifferencebetweenthehighandlow.Y5(SumX...X)15H5thehighesthighoverthelastfivebars5L5thelowestlowoverthelastfivebars5TDREI5(Yy(H2L))310055TDREI:RecommendedSettings07_Perl_ch07.indd1328/08/57:40:43PM TDOscillaTOrs133TDDeMarkerIandTDDeMarkerIITDDeMarkerI.TDDeMarkerIissimilartoTDREI,inthatitattemptstodifferentiatebetweentrendingandnontrendingmarkets,andthen,havingdefinedtheunderlyingdirectionalbias,itlooksforshort-termreversalsbasedonhowtheindicatorrespondstooverboughtandoversoldlevels.Specifically,TDDeMarkerItakesthehighandlowofthecurrentpricebarandcomparesthemwiththecorrespondinghighandlowofthepreviouspricebar.Ifthecurrenthighisgreaterthan,orequalto,theprevioushigh,thedifferenceiscalculatedandtheresultingvaluestored.nTDDeMarkerIToArriveattheNumerator:1.Ifthecurrenthighisbelowthepriorhigh,thebarisassignedavalueofzero,andthevaluesaddedtooneanotheroveraperiodofthirteenpricebars.2.Thelowofthecurrentpricebaristhencomparedwiththelowofthepriorbar,and,ifthecurrentlowislessthan,orequalto,thepreviouspricebar’slow,thedifferencebetweenthetwoisstored.3.Ifthelowofthecurrentpricebarisabovethepriorlow,thebarisassignedavalueofzero,andthevaluesoveraperiodofthirteenpricebarsaddedtooneanother,andtotheresultofthecalculationoftherelationshipsbetweenthehighs.ToArriveattheDenominator:Addthenumeratortothesumoftheresultfromthelowpricecomparisonstoarriveatthedenominator.ToArriveattheTDDeMarkerI:Dividethenumeratorbythedenominator.Theresultwillfluctuatebetweenzeroandonehundred,withoverboughtandoversoldzonessetat60and40,respectively.AswiththeTDREI,theamountoftimethatTDDeMarkerIspendsineitheroverboughtoroversoldterritory(itsduration)helpstodistinguishbetweenrangesandmildandstrongtrends(Figure7.5).Thatsaid,itisnotenoughfortheindicatorsimplytobeoverboughtoroversold;foraprospectivebuy,otherconditionsshouldalsobesatisfied.07_Perl_ch07.indd1338/08/57:40:44PM 134DeMarkIndicators10.009.509.008.508.007.507.006.5050Oct29Nov30Dec31Jan31Feb28Mar31Apr29May31Jun30Jul29Aug31Sep30Oct31Nov30Dec3020042005FIguRe7.5OverboughtTerritoryInthedailychartofsilver(basisspot),theshadedareasonTDDeMarkerIrepresenttimeswhenthemarketisinextremeoverboughtoroversoldterritory.Iftheindicatorisinextremeoverboughtterritoryformorethanthirteenperiodsandthensubsequentlygoesmildlyoverboughtbeforereturningtoneutral,thisoftencoincideswithaninterimtop.Ifpricesareinextremeoverboughtterritory,andthenTDDeMarkerIgoesbelow50beforebecomingmildlyoverbought,itoftensignalsaresumptionoftheuptrend.(Thereverseistrueforextremeoversoldreadings.)nOtherConditionsThatMustBeSatisfiedforaProspectiveBuy1.Theremustbeanindicatorreadingbelow40forthirteenbarsorfewer,2.Theclosemustbelessthantheloweitheroneortwopricebarsearlier,3.Theclosemustbebelowthepriorcloseandtheopen,4.Theopenofthefollowingbarshouldbelessthan,orequalto,theclosesofeitheroftheprevioustwobars,and5.Thepricemusttradeaboveoneofthepriorcloses.Assoonasthissequenceofeventsoccurs,thereisanopportunityforalongentry.Foraprospectivesell,therearealsoconditionsthatmustbesatisfied.07_Perl_ch07.indd1348/08/57:40:47PM TDOscillaTOrs135nOtherConditionsThatMustBeSatisfiedforaProspectiveSell1.Theremustbeanindicatorreadingabove60forsixbarsorfewer,2.Theclosemustbegreaterthanthehigheitheroneortwopricebarsearlier,3.Theclosemustbeabovethepriorcloseandtheopen,4.Theopenofthefollowingbarshouldbeabove,orequalto,theclosesofeitheroftheprevioustwobars,and5.Thepricemusttradebelowoneofthepriorcloses.Assoonasthissequenceofeventsoccurs,anopportunityexistsforashortentry.TDDeMarkerI:RecommendedSettingsTDDeMarkerII.UnlikeTDREIandTDDeMarkerI,whichcomparecurrenthighsandlowswithhighsandlowsonebarearlier,TDDeMarkerIIlooksatanumberofpricerelationshipstomeasurebuyingandsellingpressure(Figure7.6).07_Perl_ch07.indd1358/08/57:40:47PM 136DeMarkIndicators15.0014.0013.0012.0011.0010.0050Mar31Apr14Apr28May15May31Jun15Jun30Jul14Jul31Aug15Aug31FIguRe7.6OverboughtTerritoryInthedailychartofsilver(basisspot),theshadedareasonTDDeMarkerIIrepresenttimeswhenthemarketisinextremeoverboughtoroversoldterritory.Iftheindicatorisinextremeoverboughtterritoryformorethaneightperiodsandthensubsequentlygoesmildlyoverboughtbeforereturningtoneutral,thisoftencoincideswithaninterimtop.IfpricesareinextremeoverboughtterritoryandthenTDDeMarkerIIgoesbelow50beforebecomingmildlyoverbought,itoftensignalsaresumptionoftheuptrend.(Thereverseistrueforextremeoversoldreadings.)nTDDeMarkerII(ToMeasureBuyingPressure)ToArriveattheNumerator:1.Lookatthedifferencebetweenthehighofthecurrentpricebarandthecloseofthepreviousbar’sclose,overaperiodofeightbars,2.Addtheresulttothedifferencebetweenthecloseofthecurrentbaranditstruelowoveraperiodofeightbars,3.Subtractthepreviousclosefromthecurrenthigh,and4.Assignanynegativereturnsavalueofzero.ToArriveattheDenominator:Add1.Thenumerator,2.Thedifferencebetweenthelowofthecurrentpricebarandthecloseofthepreviousbarinthesameeight-barperiod,and07_Perl_ch07.indd1368/08/57:40:51PM TDOscillaTOrs1373.Thedifferencebetweenthecurrentbar’struehighanditsclose.Note:Thisdifferenceisreferredtoastheselling-pressurevalue.TDDeMarkerII:RecommendedSettingsTDpressureDeMarkbelievesthatpriceactionisdirectlyinfluencedbysupplyanddemandfactors.Sinceachangeinvolumeoftenprecedespricemoves,itmakessensetocombineindicatorsthatmeasuretherateofchangeinpricewithindicatorsthatmeasuretherateofvolumechange.TDPressuredoesthis,whileincorporatingarateofchangeinaccumulationanddistributionofthisdata(Figure7.7).Thestartingpointfortheaccumulation/distributionmeasurementistheindicatorOnBalanceVolume(OBV):nTheOBVIndicatorTheOBVindicatorgeneratesacumulativevolume-basedindexderivedfromtherelationshipbetweenthecurrentandpreviousday’sclose.Forexample:Ifthecurrentday’scloseisabovethepreviousday’sclose,thecurrentday’svolumeisaddedtotheindex.07_Perl_ch07.indd1378/08/57:40:52PM 138DeMarkIndicators15801560154015201500148014601440142014001005002.800m2.700m2.600mOct22Oct31Nov8Nov15Nov23Nov30Dec7Dec14Dec24Dec312007FIguRe7.7TDPressureAppliedtotheS&P500FuturesContinuationChartIfthecurrentday’scloseisbelowthepreviousday’sclose,volumeisdeductedfromtheindex.DeMarkargues,however,thattherelationshipbetweenthecurrentday’sopenanditscloseisfarmoreimportant,andabetterrepresentationofdemandandsupply,thanthecomparisonbetweenthecurrentday’scloseandthepreviousday’sclose.Substitutingthecurrentday’sopenforthepreviousday’scloseisanimprovement,butitisstillsomewhatmisleading.ItisforthisreasonthatDeMarkdevisedaratiobysubtractingthecurrentday’sopenfromthecurrentday’sclose,dividedbythecurrentday’srange,whichassignspercentagestobuyingandsellingpressure.Thatratioismultipliedbythecurrentday’svolumenumbers,andtheresultistotaledovertime.Thismakesmuchmoresense,since,ifthemarketclosesaboveitsopen,andtheopenhappenedalsotobetheday’slow,itisareasonableassumptionthat100percentofallpriceactionthatdaywasbuyingpressure.07_Perl_ch07.indd1388/08/57:40:55PM TDOscillaTOrs139Conversely,ifthemarketclosesbelowtheopen,andtheopenthatdayhappenstocoincidewiththehigh,itisfairtoconcludethat100percentofallpriceactionwassellingpressure.Theresultsareaggregatedovertimeinsuchawaythatbuyingpressureisdividedbytheabsolutevalueofbuyingplussellingpressure,todetermineapercentagethatcanbeplottedasanoverbought/oversoldindicator.Arrowsappearwhentheindexmovesoutofoverboughtoroversoldterritory.Note:Futuresmarketsincorporateopeninterest(whereasstocksdon’t),and,so,dividingvolumebyopeninterest,andthenmultiplyingthatratiobyvolume,isaclearerrepresentationofbuyingandsellingpressure.DeMarkusesafive-price-barperiodandcomparesthecurrentcloseandopen,dividedbythecurrentday’srange,andmultipliedbythecurrentday’svolume.Thefive-barratioofthatbuyingpressureistotaledandthendividedbytheabsolutevalueofthosefivepricebars.TDpressure:RecommendedSettings07_Perl_ch07.indd1398/08/57:40:56PM 140DeMarkIndicatorsTDRateofchange(TDROc)TDROCisanintegralcomponentofTDAlignment,butcanalsobeusedinisolationasanoverbought/oversoldindicator(Figure7.8).nToDeterminetheTDROCDividethecloseofthecurrentpricebarbytheclosetwelvepricebarsearlier.Note:Theassociatedoverbought/oversoldbandfluctuatesbetween97.5percentand102.50percent(themarketisconsideredneutralwhentradingstaysbetweentheselevels).AswithotherTDoscillators,theamountoftimespentinoverbought/oversoldterritoryiscriticalfordifferentiatingbetweenmildandextremereadings.Mildoverbought/oversoldreadingsoftencoincidewithneartermreversals,whileextremeoverbought/oversoldreadingsareindicativeofstrongbuying/sellingpressure.Whenmildreadingsareobserved,opportunisticshort-termbuyingandsellingopportunitiesexist.Togenerateatradingopportunitywhenextremereadingsareseen,lookforareturntoneutralterritory,followedbyamildreading.TDROc:RecommendedSettings07_Perl_ch07.indd1408/08/57:40:56PM TDOscillaTOrs141160015501500145014001350130012501051009590Jul13Jul31Aug15Aug31Sep14Sep28Oct15Oct31Nov15Nov30Dec14Dec31Jan152007FIguRe7.8TDROC.TDRateofChangeAppliedtotheS&P500FuturesContinuationChartTDalignmentTDAlignment(Figure7.9)isacompositeindicatorthatcombinesthefollowingfiveTDoscillatorstomeasurebuyingandsellingpressure:TDDeMarkerI,TDDeMarkerII,TDPressure,TDRangeExpansionIndex,andTDRateofChange.Eachoftheindicatorshasitsowndistinctmethodofmeasuringoverbought/oversoldconditions.nTDAlignmentCombine:TDDeMarkerI,TDDeMarkerII,TDPressure,TDRangeexpansionIndex,andTDRateofChange.Whentheindicatorisabovethepredefinedoverboughtzone,itisgivenavalueof11,and,Whentheindicatorisbelowthepredefinedoversoldzone,itisassignedavalueof21.07_Perl_ch07.indd1418/08/57:40:59PM 142DeMarkIndicators1600155015001450140013501300125050–5Feb28Mar30Apr30May31Jun29Jul31Aug31Sep28Oct31Nov30Dec312007FIguRe7.9TDAlignmentAppliedtotheS&P500FuturesContinuationChartnToProducetheCompositeTDAlignmentIndicator,Aggregatethevaluessotheyfluctuatebetween25and15.ExtremeTDAlignmentreadingsateither25or15areoftenassociatedwithnear-termpriceexhaustion,particularlywhencombinedwithotherTDindicatorslikeTDSequentialorTDCombo.Note:TherecommendedsettingsforthecomponentsofTDAlignmentdifferfromtherecommendeddefaultsforthoseconstituentindicatorswhentheyareusedindependently.TDalignment:RecommendedSettings:07_Perl_ch07.indd1428/08/57:41:02PM TDOscillaTOrs14307_Perl_ch07.indd1438/08/57:41:05PM 07_Perl_ch07.indd1448/08/57:41:05PM chapter8TDMovingAveragesMovingaveragesareperhapsthemostwidelyusedmarketanalysistools,appliedbytechnicalandfundamentaltradersalike.Inmyexperience,however,thetrendislikeaparachute:Ifit’snotthereforyouthefirsttimeyoureallyneedittowork,thenit’sunlikelyyou’lleverhavemuchuseforitagain.Asanyonewhohastradedthecurrencymarketsinrecentyearswilltellyou,movingaveragesareallwellandgoodwhenpricesaretrendingsmoothly,buttheyhaveanumberofshortcomings.First,theytendtogetwhipsawedwhenpricesaretradinglaterallyforprolongedperiodsoftime,andsecond,movingaverageslagpriceaction,andsotheentryandexitsignalstheygenerateareinherentlyinefficient.Ofcourse,youcanincreasethelengthofthemovingaveragetoreducethewhipsawrisk,butthatsimplymeansthattheindicatorbecomeslessresponsivetofluctuationsinprice,andthereforelesseffectiveatidentifyingchangesinthetrendduringtheearlystagesofareversal.TomDeMarkdevelopedTDMovingAverageIandTDMovingAverageIItoaddresstheseconcerns.TDMovingAverageIwasoriginallyintendedtobeusedasatrailingstop-lossasameansofexitinganestablishedposition,but,overtime,ithasprovedparticularlyusefulindeterminingifamarketistrending,and,ifso,inprovidingentrypointstoinitiateatradeinlinewiththeexpecteddirectionalmove.AswithalltheTDindicators,thisstudyisbasedonrelativepriceaction,andsoyoucanapplyittoanymarketortimeframewithouthavingtochangeanyofthe14508_Perl_ch08.indd1458/08/57:41:37PM 146DeMarkIndicatorsdefaultsettings.Soit’sworthkeepinganeyeonmultipletimeframesandmonitoringthemwhenthereisaconfluenceofbullish,bearish,orneutralsignals.nToIdentifyaProspectiveBullishTrendIfThereisapricelowthatishigherthanalltwelvepriorpricelows,ThenIt’slikelythatsellingpressureiswaningandthemarketispredisposedtoadvancing,nearterm.TDMovingAverageIservestorecognizethisnewlypositivedevelopment.nPlottingaBullishTDMovingAverageITDMovingAverageIplotsafive-barmovingaverageofthelowsandextendsitforanotherfourpricebars,thatis,thecurrentpricebarandthreemoreintothefuture.If,withinthenextfourpricebars,Themarketfailstopostafreshlowabovealltwelvepriorlows,ThenThemovingaverageofthelowsdisappears.Butif,withinthefour-barextensionperiod,Themarketdoesrecordalowgreaterthanalltwelvepreviouslows,ThenThefive-barmovingaverageofthelowswillcontinueforanotherfourbars.Thisway,themovingaverageofthelows(Figure8.1)remainsinplaceaslongasthemarketcontinuestoexhibitsignsofstrength.YoushoulduseTDMovingAverageIinconjunctionwithotherDeMarkindicators,but,ifyouarealreadyinalongposition,youshouldremainso,unlessthemarketclosesbeneaththefive-barmovingaverageofthelowsandthenthenextbaropensbelowit.nToIdentifyaProspectiveBearishTrendIfThereisapricehighthatislowerthanalltwelvepriorpricehighs,08_Perl_ch08.indd1468/08/57:41:37PM TDMovingAverAges147320003000028000260002400022000Lowisabovealltwelveprevious20000lows,therebyinitiatingthefive-periodmovingaverageofthelows.18000Jul13Jul31Aug15Aug31Sep14Sep28Oct15Oct31Nov15FIgure8.1TDMovingAverageIInthedailychartoftheHangSeng,thefive-periodmovingaverageofthelowsisinitiatedwhenthemarketrecordsalowthatisabovealltwelvepriorlows.Theaverageisextendedforafurtherfourpricebarsintothefutureeverytimetheconditionissatisfied.Youwouldremainbullishunlessthemarketclosesbelowtheaverageandthenopensbelowitthefollowingbar.ThenItislikelythatbuyinginteresthasabatedandthemarketispredisposedtosellingoffnearterm.TDMovingAverageIrecognizesthisnewlynegativedevelopment.nPlottingaBearishTDMovingAverageITDMovingAverageIplotsafive-barmovingaverageofthehighsandextendsitforanotherfourpricebars,thatis,forthecurrentpricebarandthreemoreintothefuture.If,withinthenextfourpricebars,Themarketfailstopostafreshhighbelowalltwelvepriorhighs,ThenThemovingaverageofthehighsdisappears.08_Perl_ch08.indd1478/08/57:41:40PM 148DeMarkIndicatorsButifThemarketdoesrecordahighlowerthanalltwelveprevioushighswithinthefour-barextensionperiod,ThenThefive-barmovingaverageofthehighswillcontinueforanotherfourpricebars.Thisway,themovingaverageofthehighs(Figure8.2)remainsinplaceaslongasthemarketcontinuestoshowsignsofweakness.YoushoulduseTDMovingAverageIinconjunctionwithotherDeMarkindicators,but,ifyou’realreadybearishandthemarketistradingbeneaththefive-barmovingaverageofthehighs,youshouldremainshort,unlessthemarketclosesabovetheaverageandthenopensaboveitatthenextbar.Inadditiontoprovidinganinsightintowhentocloseoutatrade,TDMovingAverageIishelpfulinanumberofotherways,suchas,whenamovingaverageofeitherthelowsorthehighsisplotted,230Highisbelowalltwelveprevioushighs,therebyinitiatingthefive-periodmovingaverageofthehighs.22522021521020561011121317181920242526272812347910111416171821222425282930112/712/1412/2112/311/81/151/231/312007FIgure8.2TDMovingAverageIInthedailychartofgBPJPY,thefive-periodmovingaverageofthehighsisinitiatedwhenthemarketrecordsahighthatisbelowalltwelvepriorhighs.Theaverageisextendedforafurtherfourpricebarsintothefutureeverytimetheconditionissatisfied.Youwouldremainbearishunlessthemarketclosesabovetheaverageandthenopensbeyonditthefollowingbar.08_Perl_ch08.indd1488/08/57:41:43PM TDMovingAverAges149whenitindicatesthatthemarkethasmomentumbehinditandcanbetradeddirectionally.Assuch,itprovidesagoodlevelfromwhichtoinitiateeitherlongpositions,followingdipstothemovingaverageofthelows,orshortpositions,followingralliestothemovingaverageofthehighs.Conversely,whennomovingaverageisbeingplotted,nodiscernabletrendexists,andtradersshouldnotbeinitiatingdirectionaltradesatthattime.tDMovingaverageI:recommendedSettingsFordie-hardtrendfollowers,DeMarkoffersanalternative,TDMovingAverageII,whichremainstruetothecauseinthesensethatitconsistsoftwoconventionalsimplemovingaverages—oneshorttermandonelongterm,basedonclosingprices.Inthisinstance,thoselengthsarethreebarsandthirty-fourbars,respectively.Unliketraditionalmovingaverages,however,TDMovingAverageIIappliesarateofchange(ROC),toeachoftheaverages.ThecolorofthemovingaverageschangeswhentheROCswitchestopositive(blue),ortonegative(red).WhereasTDMovingAverageIneedsaspecificconditiontobemetinordertoappearonthechart(soitcanindicatethemarketistrending),TDMovingAverageII(Figure8.3)isalwaysdisplayed.Asisthecasewithregularmovingaverages,therelativepositionof08_Perl_ch08.indd1498/08/57:41:44PM 150DeMarkIndicators147501450014250140001375013500132501300020072008JanAprJulOctJanFIgure8.3TDMovingAverageIIInthischart,TDMovingAverageIIisappliedtoadailychartofeuruSD.Notehowtheretendstobemorefollow-throughwhenratesofchangeinbothaveragesmoveinthesamedirection.Thefollow-throughimprovesthequalityofthesignalsduringperiodsofconsolidation,whilestillshowingresponsivenesstobreakouts.Source:CQg,Inc.©2008Allrightsreservedworldwide.www.cqg.com.thetwoperiodsdeterminestheoveralltrend;thatis,whenthethreeperiodmovingaverageisabovethethirty-four–periodmovingaverage,thegeneraltoneisconsideredpositive.Conversely,whenthethree-periodmovingaverageisbelowthethirty-four–periodmovingaverage,thegeneraltoneisthoughttobenegative,but,inthiscurrentform,you’restillexposedtowhipsawrisk.SoTDMovingAverageIItakesthingstoanotherlevelbyaddingaROC.Boththeshort-termandthelonger-termaveragesarecomparedtotheirvaluesapredefinednumberofbarsearlier.Thecurrentvalueofthethree-periodmovingaverageiscomparedtothe08_Perl_ch08.indd1508/08/57:41:47PM TDMovingAverAges151correspondingvaluetwopricebarsearlier,whilethethirty-fourperiodmovingaverageiscomparedwithitsvalueonebarbefore.Tradingwithmovingaveragesstillhasitsshortcomings,andsignalsindicatingareversalintrendwillalwayslagpriceactiontoanextent,butcombiningthetwoaverages,evaluatingwheretheyareinrelationtoeachother,andthenoverlayingarateofchange,shouldattheveryleast,overtime,reducetheextenttowhichyougetwhipsawedwhenmarketsarenottrending.08_Perl_ch08.indd1518/08/57:41:47PM 08_Perl_ch08.indd1528/08/57:41:48PM chapter9TDRangeProjection,TDRangeExpansionBreakout,andTDChannelstDrangeprojectionExperienceisthebestteacher.Thefuturealwaysseemssomuchclearerinhindsight—whichiswhywecanallrelatetothethought“IfI’dknownthenwhatIknownow....”Isupposethat’swhyI’msointriguedbythemarket-timingstudiesdevelopedbyTomDeMark,manyofwhichareforward-lookinginthesensethattheyanticipateprices,animportantdistinctionfromotherstudies.TakeTDRangeProjection,forexample,theindicatorthatcomparesthecurrentclosewiththesamepricebar’sopening,high,andlow,toforecastahigh/lowrangeforthefollowingpricebar.Comparingthecurrentclosewiththepriorclosecanbesomewhatmisleading—particularlyforstocks,wherenewsisoftenannouncedaftermarketcloseorbeforemarketopen.Themarket’sclosinghigherthecurrentdaythanitdidthepreviousdaysuggestsbuyinginterest,butcouldleadtomissingasituationinwhichthecurrentday’scloseisbelowthepreviousday’sopen,whichisactuallyasignofweakness.Consequently,DeMarkconsiderstherelationshipbetweenthecurrentbar’sopenandclosetobemoresignificantthanthecomparisonofthecurrentclosetothepreviousbar’sclose.Thisstudycanbeappliedtoanymarketortimeframe,fromtickstoyears,butDeMark’spreference,andmyownaswell,istouseitfordailypricebars.Ifyou’rerelatingthecurrentcloseofaspecifiedtime15309_Perl_ch09.indd1538/08/57:42:19PM 154DeMarkIndicatorsperiodwiththecorrespondingopen,oneofthreepossiblescenariosislikely:1.Thatthecurrentday’sclosingpriceisabovethecurrentday’sopeningprice,or2.Thatthecurrentday’sclosingpriceisbelowthecurrentday’sopeningprice,or3.Thatthecurrentday’sclosingpriceisequaltothecurrentday’sopeningprice.■TheThreePossibleScenariosandHowtoCalculateThem1.Ifthecurrentday’sclosingpriceisabovethecurrentday’sopeningprice,ThenX5((21currentday’shigh1currentday’slow1currentday’sclose)y2).2.Ifthecurrentday’sclosingpriceisbelowthecurrentday’sopeningprice,ThenX5((currentday’shigh123currentday’slow1currentday’sclose)y2).3.Ifthecurrentday’sclosingpriceisequaltothecurrentday’sopeningprice,ThenX5((currentday’shigh1currentday’slow123currentday’sclose)y2).Tocalculatetheexpectedlowforthefollowingday,Subtractthecurrentday’shighfromX.Toderivethefollowingday’sprojectedhigh,Subtractthecurrentday’slowfromX.Moreoftenthannot,thefollowingday’sopenwillbesomewhereinbetweentheprojectedhighandlow(seeFigure9.1);inwhichcase,there’sareasonablechancethattheprojectedrangewillcontainpriceactionfortheday.IfaccompaniedbyotherintradayTDbuyorsellsignals,thesesituationswouldprovideacuterisk/rewardopportunitiestobuydipstowardthelowerendoftheday’srangeforecast,andtosellralliestowardthetopendoftheday’santicipatedrange.Nevertheless,weshouldn’twriteeverythingoffwhenthefollowingdayopenseitherbelowtheexpectedloworabovetheexpectedhigh.Suchanoccurrencetellsusthatthesupply/demanddynamicshaveshifted,andthatinitselfisusefulinformation.Whenthemarketopensabovetheprojectedhighorbelowtheprojectedlow,itisoftenareflectionofthenear-termtrendaspriceactioncontinuesinthedirectionofthebreakoutfortheremainderoftheday.09_Perl_ch09.indd1548/08/57:42:20PM TDRangePRojecTion,TDRangeexPansionBReakouT1551540Projectedpricehigh15201500148014601440Projectedpricelow142014001380136026272829345610111213171819202126272812/312347911/3012/712/1412/241/82007Figure9.1TDRangeProjection:ProjectingHighsandLowsinthedailychartoftheMarch2008S&P500futures,notehowtheprojectedhighandlowprovideausefulguidetotheday’stradingactivity.Wecangleanevenmoreinsightintothefollowingpricebar’sexpectedactivityifweincludewhatDeMarkreferstoastheTDToleranceLevel.TheupsideTDToleranceLevelmultipliesthepreviouspricebar’struerangeby15percentandaddstheresulttothecurrentpricebar’sopen.ThedownsideTDToleranceLevelmultipliesthepreviouspricebar’struerangeby15percentandsubtractstheresultfromthecurrentpricebar’sopen.IfthemarketopenswithintheprojectedrangeandthendipsbelowthedownsideTDToleranceLevelbeforethehighexceedstheprojectedhigh,thenit’slikelythatthemarketwillclosewithintheprojectedrange(Figure9.2).Ifthemarketopenswithintheprojectedrange,andthehightradesabovetheprojectedhighbeforethepricetradesbelowtheprojectedlowandthedownsideTDToleranceLevel,itislikelythatthemarketwillcloseabovetheprojectedhigh(Figure9.3).IfthemarketopenswithintheprojectedrangeandthenmovesabovetheupsideTDToleranceLevelbeforethelowexceedstheprojectedlow,thenitislikelythatthemarketwillclosewithintheprojectedrange.09_Perl_ch09.indd1558/08/57:42:24PM 94.0092.0090.0088.0086.00Priceexpectedtoclosewithintheprojectedrange.2911/30345612/7Figure9.2TDRangeProjection:ClosingBackWithintheRangeinthedailychartofcrudeoilfutures(WTi),priceshouldclosebackwithintheprojectedrange.102.00Priceexpectedtoclose101.00abovetheprojectedhigh.100.0099.0098.0097.0096.0095.0094.00272812/3123472007Figure9.3TDRangeProjection:ClosingAbovetheProjectedHighinthedailychartofthecrudeoilfuture(WTi)above,priceshouldcloseabovetheprojectedhigh.15609_Perl_ch09.indd1568/08/57:42:29PM TDRangePRojecTion,TDRangeexPansionBReakouT15797.0096.0095.0094.0093.0092.00Priceexpectedtoclosebeneaththeprojectedlow.91.00611/78912Figure9.4TDRangeProjection:ClosingBelowtheProjectedLowinthedailychartoftheoilfutures(WTi),thepriceshouldclosebelowtheprojectedlow.Ifthemarketopenswithintheprojectedrange,andthelowtradesbelowtheprojectedlowbeforethepricetradesabovetheprojectedhighandtheupsideTDToleranceLevel,itislikelythatthemarketwillclosebelowtheprojectedlow(Figure9.4).tDrangeexpansionBreakout(tDreBO)TheTDREBOisbasedonthenotionthat,whenpricebreakscertainlevelsonanintrabarbasis(seeFigures9.5,9.6,9.7,and9.8),itoftenactsasaprecursoroffurtherstrengthorweaknessfortheremainderofthatpricebar.Say,forexample,thatthemarkethasbeenconfinedtoatightrangeforawhile.Ifitthenviolatesafixedpercentageofthatrange,anextendedbreakoutislikely.TDREBOattemptstoidentifythatinitialpricebreak,toenabletraderstoparticipateinthemove,untilasignaloccursintheoppositedirection.Theuserchoosesapredefinednumberofbarsandthepercentagevalue,butthestructureitselfisclear.Furthermore,ifqualifiersareincorporatedintothebasicapproach,thestudycanbeusedasacountertrendindicator,tobuyweaknessandsellstrength.AlthoughitwouldmakemoresensetocombineTDREBO09_Perl_ch09.indd1578/08/57:42:31PM 158DeMarkIndicators15400001535000153000015250001520000151500015100001505000Z15000001495000149000014850001480000X14750001470000Y146500014600001455000145000019202122Figure9.5TDRangeExpansionBreakout(REBO):ExpectationforanExtendedUpMoveinthedailychartoftheNikkei225(basiscash),thecloseofpricebarXislowerthanthecloseofpricebarY.Consequently,whenthemarkettradesabovebarZ’sopen1(therangeofbarX30.382),theexpectationisforanextendedupmovetowardbarZ’sopen1(therangeofbarX30.618).Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.withotherTDindicatorstoconfirmthesignalsthantorelyonTDREBOinisolation,thisstrategyisusefulnonethelessandcanbeusedeithertogenerateentrypointsortoprovidestops.MypreferenceistoapplyTDREBOtodailypricebarsandusethecurrentpricebar’sopenasthebase.■ToApplyTDREBOtoDailyPriceBarsandUsetheCurrentPriceBar’sOpenastheBaseFirst,Multiplythepreviousday’struerangeseparatelyby0.382andby0.618.ThenTocalculateupsidelevels,Addthosevaluestothecurrentday’sopeningprice.09_Perl_ch09.indd1588/08/57:42:33PM TDRangePRojecTion,TDRangeexPansionBReakouT1591730000172750017250001722500Y1720000171750017150001712500X171000017075001705000Z1702500170000016975001695000169250016900001687500168500016825001680000070809Figure9.6TDRangeExpansionBreakout(REBO):ExpectationforaNear-TermUpsidePriceExhaustioninthedailychartoftheNikkei225(basiscash),thecloseofpricebarXisabovethecloseofpricebarY.Consequently,whenthemarketreachesbarZ’sopen1(therangeofbarX30.618),theexpectationisfornear-termupsidepriceexhaustion.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.Todeterminedownsidelevels,Subtractthemfromthecurrentday’sopeningprice.UsingthequalifiersDeMarkrecommendsforqualifyingTDLinebreaks,youcanisolateinstancesinwhich,ifthemarketbreaksthefirstupsidelevel,itislikelytoreachthesecondupsidelevelonanintradaybasis.Forexample,ifyesterday’sclosewasadownclosecomparedwiththepreviousday’sclose,andthenpricetakesoutyesterday’struerangemultipliedby0.382andaddedtotoday’sopen,there’sagoodchancetheupmovewillextendhighertowardyesterday’struerangemultipliedby0.618andaddedtotoday’sopenonanintradaybasis.Conversely,ifyesterday’sclosewasanupclosecomparedwiththepreviousday’sclose,andthenpricetakesoutyesterday’struerangemultipliedby0.382andaddedtotoday’sopen,I’dbeinclinedtofadethemarket,andgoshortonanintradaybasisifitreachesyesterday’struerangemultipliedby0.618andaddedtotoday’sopen.09_Perl_ch09.indd1598/08/57:42:35PM 160DeMarkIndicators1410000Z140500014000001395000X1390000Y138500013800001375000137000013650001360000135500013500001345000134000013362631335000133000013271971617182122Figure9.7TDRangeExpansionBreakout(REBO):ExpectationforanExtendedDownMoveinthedailychartoftheNikkei225(basiscash),thecloseofpricebarXishigherthanthecloseofpricebarY.Consequently,whenthemarkettradesbelowbarZ’sopen–(therangeofbarY30.382ofbarX),theexpectationisforanextendeddown-movetowardbarZ’sopen–(therangeofbarX30.618).Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.Similarly,ifyesterdaywasanupclosecomparedwiththepreviousday’sclose,andthenpricetakesoutyesterday’struerangemultipliedby0.382subtractedfromtoday’sopen,there’sagoodchancethedownmovewillextendlower,onanintradaybasis,towardyesterday’struerangemultipliedby0.618andsubtractedfromtoday’sopen.Conversely,ifyesterday’sclosewasadownclosecomparedwiththepreviousday’sclose,andthenpricetakesoutyesterday’struerangemultipliedby0.382andsubtractedfromtoday’sopen,I’dbeinclinedtofadethemarketandgolongonanintradaybasisifpricereachesyesterday’struerangemultipliedby0.618andsubtractedfromtoday’sopen.tDchannelsI’vealwaysfoundtheconceptofpricechannelsinteresting,butmanyofthetraditionalapproachestochannelconstructionincorporatethe09_Perl_ch09.indd1608/08/57:42:38PM TDRangePRojecTion,TDRangeexPansionBReakouT1611672500Y167000016675001665000X166250016600001657500Z165500016525001650000164750016450001642500164000016375001635000163250016300001627500162500016225001620000232425Figure9.8TDRangeExpansionBreakout(REBO):ExpectationforaNear-TermDownsidePriceExhaustioninthedailychartoftheNikkei225(basiscash)above,thecloseofpricebarXisbelowthecloseofpricebarY.Consequently,whenthemarketreachesbarZ’sopen–(therangeofbarX30.618),theexpectationisfornear-termdownsidepriceexhaustion.Source:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.currentpricebarintheircalculations,andtheiroutputisthensuspect.Consequently,itisfrustratingeachtimethemarketpostsanewhighorlow,becausethismeansthegoalpostsarecontinuouslyshiftingonanintrabarbasis.DeMarkdevelopedTDChannelIandTDChannelIItoaddressthisperceivedproblem.TDChannelI.TheconstructionofTDChannelImayseemcounterintuitive,sinceapercentagemultipliedbyaseriesoflowsisusedtoarriveattheupperchannel,andapercentagemultipliedbyaseriesofhighsisusedtodeterminethelowerchannel.■TDChannelI(ForCurrencies,Commodities,andFuturesMarkets)Tocalculatetheupper-channelboundary,Multiplyathree-barmovingaverageofthelowsby1.03.09_Perl_ch09.indd1618/08/57:42:40PM 162DeMarkIndicatorsTocalculatethelower-channelboundary,Multiplyathree-barmovingaverageofthehighsby0.97.Notethat,whilethecurrentpricebarisusedinthecalculation,theprojectedupperchannelremainsconstantwhenpricesaremovinghigher,whiletheprojectedlowerlevelremainsconstantwhenthemarketpushesdownward.DeMarkrecommendsexpandingtheratiomultipliersto91percentand109percentwhenlookingatsinglestocks.Moreoftenthannot,whenpricesarerangebound,themarketwillbecontainedwithintheconfinesofTDChannelI,butabreakofeithertheupperorthelowerlevelstendstocoincidewithmarketexhaustion.Thechannelextremestendtobelesseffectivewhenmarketsaretrending,buttheystillprovidesomevalue,helpingtoisolatelevelsthatwouldhelpinitiatenear-termpricereversals.Whenthemarketclosesoutsidethechannel(Figures9.9and9.10),itisoftenashort-termsignthattheestablishedtrendisvulnerable,particularlyifaccompaniedbyatrend-exhaustionsignalsuchasaTDSequentialorTDCombosignal.TDChannelII.Unliketheless-orthodox,contemporaryindicatorTDChannelI,TDChannelIIiscalculatedinamore-conventionalmanner.■TDChannelIITodeterminetheupper-channelboundary,Multiplyathree-barmovingaverageofthehighs(includingthecurrentpricebar)by0.995.Toidentifythelower-channelboundary,Multiplyathree-barmovingaverageofthelows(includingthecurrentpricebar)by1.005.Forsinglestocks,usearatioof0.930or1.070.Priceexcursionsoutsideofeithertheupper-orlower-channelboundary(Figures9.11and9.12)areoftenassociatedwithnear-termtrendexhaustion.Inthisinstance,twoconsecutiveclosesinthesamedirectionoutsidethechannelboundariesoftencoincidewithashorttermcorrection.09_Perl_ch09.indd1628/08/57:42:40PM AcloseaboveTDChannelIisoftenassociatedwithupsidepriceexhaustion.1680016600164001620016000158001560024272829308/3134569/71011Figure9.9TDChannelI:HowtheMarketReversesinthedailychartoftheNikkei225(basiscash),priceismoreoftenthannotcontainedwithintheboundariesoftheupperandlowerchannels,butnotehowthemarketreversescoursefollowingacloseabovetheupperchannelextreme.17800176001740017200170001680016600AclosebeneathTDChannelIisoften16400associatedwithdownsidepriceexhaustion.3/7891213143/151619203/222326Figure9.10TDChannelI:HowtheMarketCorrectsinthedailychartoftheNikkei225(basiscash),priceismoreoftenthannotcontainedwithintheboundariesoftheupperandlowerchannels,butnotehowthemarketcorrectshigherfollowingaclosebeneaththelowerchannelextreme.16309_Perl_ch09.indd1638/08/57:42:43PM Twoconsecutiveclosesinthesame1560directionaboveTDChannelIIareoftenassociatedwithupsidepriceexhaustion.15401520150014801460286/2923567/9101112137/16171819207/23242526Figure9.11TDChannelII:TheMarketCorrectingLowerinthedailychartoftheS&P500(basiscash),notehow,aftertwoconsecutiveclosesaboveTDChannelii,themarketcorrectslower.TwoconsecutiveclosesinthesamedirectionaboveTDChannelIIare6750oftenassociatedwithupsidepriceexhaustion.6700665066006550650064506400TwoconsecutiveclosesinthesamedirectionbeneathTDChannelIIareoftenassociatedwithdownsidepriceexhaustion.1910/2223242526293010/3112Figure9.12TDChannelII:TheMarketCorrectingLower(Again)inthedailychartoftheFTSe100(basiscash),notehow,aftertwoconsecutiveclosesbelowTDChannelii,themarketcorrectshigher,and,aftertwoconsecutiveclosesaboveTDChannelii,themarketcorrectslower.16409_Perl_ch09.indd1648/08/57:42:49PM chapter10Short-TermIndicatorsTDDifferential,TDReverseDifferential,andTDAnti-DifferentialTheindicatorsinthischapterareforidentifyingpricepatternsonashort-termbasis.tDDifferentialTDDifferentialattemptstocomparebuyingandsellingpressureoveratwo-barhorizon.Buyingpressureisdefinedasthedifferencebetweenthecloseofthecurrentpricebaranditstruelow(thetruelowisthelesserofeitherthecurrentbar’sloworthepreviouspricebar’sclose);sellingpressureisrepresentedbythedifferencebetweenthecloseofthecurrentbaranditstruehigh(thetruehighisthegreaterofthecurrentpricebar’shighorthepreviouspricebar’sclose).WhenanuparrowappearsafteraTDDifferentialstudyisapplied(Figure10.1),itsuggeststhatthehighofthenextpricebarwillbegreaterthanthehighofthecurrentpricebar,orattheveryleast,thatthenextpricebar’sclosewillbeabovethecurrentpricebar’sclose.■ConditionsNecessarytoProduceaTDDifferentialUpArrowThefollowingaretheconditionsnecessarytoproduceanuparrow:1.Theremustbetwoconsecutivecloses,eachonelessthantheoneprior,2.Buyingpressureforthecurrentpricebarmustexceedbuyingpressurefromthepreviouspricebar,and3.Sellingpressureforthecurrentpricebarmustbelessthansellingpressurefromthepreviouspricebar.16510_Perl_ch10.indd1658/08/57:45:33PM 166DeMarkIndicators1.33001.32001.31001.30001.29001.28001.2700242526293012568912131516192022232627125679121314161/312/72/142/212/283/83/15Figure10.1ASeriesofTDDifferentialUpArrowsThedailychartofeuruSDdepictsaseriesofTDDifferentialuparrows.ineachinstance,themarketmeetsallthreeofthefollowingconditions:1)Therearetwoconsecutivecloses,eachonelessthantheoneprior;2)buyingpressureforthepricebarmarkedwiththearrowexceedsbuyingpressurefromthepreviouspricebar;and3)sellingpressureforthepricebarmarkedwiththearrowislessthansellingpressurefromthepreviouspricebar.WhenadownarrowappearsafteraTDDifferentialstudyisapplied(Figure10.2),itsuggeststhelowofthenextpricebarwillbelessthanthelowofthecurrentpricebar,orattheveryleast,thenextpricebar’sclosewillbebeneaththecurrentpricebar’sclose.■ConditionsNecessarytoProduceaTDDifferentialDownArrowThefollowingaretheconditionsnecessarytoproduceadownarrow:1.Theremustbetwoconsecutivecloses,eachonegreaterthantheoneprior,2.Sellingpressureforthecurrentpricebarmustexceedsellingpressurefromthepreviouspricebar,and3.Buyingpressureforthecurrentpricebarmustbelessthanbuyingpressurefromthepreviouspricebar.10_Perl_ch10.indd1668/08/57:45:39PM Short-termIndIcatorS167640062006000580056005400Apr13Apr21Apr28May8May15May23May31Jun8Figure10.2ASeriesofTDDifferentialDownArrowsThedailychartofthegermanDax(basiscash)depictsaseriesofTDDifferentialDownarrows.ineachinstance,themarketmeetsallthreeofthefollowingconditions:1)Therearetwoconsecutivecloses,eachonegreaterthanoneprior;2)sellingpressureforthepricebarmarkedwiththearrowexceedssellingpressurefromthepreviouspricebar;and3)buyingpressureforthepricebarmarkedwiththearrowislessthanbuyingpressurefromthepreviouspricebar.tDreverseDifferentialTDReverseDifferentialissimilartoTDDifferential,inthesensethatittriestomeasurebuyingandsellingpressuretodeterminefuturepricemovements,but,whereasTDDifferentialisanear-termtrend-reversalpattern,TDReverseDifferentialisanear-termtrend-continuationpattern(seeFigures10.3and10.4).■ConditionsNecessarytoProduceaTDReverseDifferentialDownArrow1.Theremustbetwoconsecutivecloses,eachonelessthanthepriorclose,2.Thecurrentpricebar’sbuyingpressuremustbelessthanthepreviouspricebar’sbuyingpressure,and3.Thecurrentpricebar’ssellingpressuremustbegreaterthanthepreviousbar’ssellingpressure.10_Perl_ch10.indd1678/08/57:45:42PM 32.0031.0030.0029.0028.0027.00910111617181923242526293012568912131516202223262712567…1/121/221/312/72/142/212/283/8Figure10.3ASeriesofTDReverseDifferentialDownArrowsThedailychartofMicrosoftdepictsaseriesofTDreverseDifferentialDownarrows.ineachinstance,themarketmeetsallofthefollowingconditions:1)Therearetwoconsecutivelowercloses,eachonelessthanthepriorclose;2)sellingpressureforthepricebarmarkedwiththedownarrowisgreaterthanthepreviouspricebar’ssellingpressure;and3)buyingpressureforthepricebarmarkedwithadownarrowislessthanthepreviousbar’sbuyingpressure.550054005300520051002125262728234561011121317181920242526273012367910139/229/2910/910/1610/2310/3111/8Figure10.4ASeriesofTDReverseDifferentialUpArrowsThedailychartoftheCAC40(basiscash)depictsaseriesofTDreverseDifferentialuparrows.ineachinstance,themarketmeetsallofthefollowingconditions:1)Therearetwoconsecutivehighercloses,eachonegreaterthanthepriorclose;2)buyingpressureforthepricebarmarkedwiththeuparrowisgreaterthanthepreviouspricebar’sbuyingpressure;and3)sellingpressureforthepricebarmarkedwithanuparrowislessthanthepreviousbar’ssellingpressure.16810_Perl_ch10.indd1688/08/57:45:48PM Short-termIndIcatorS169■ConditionsNecessarytoProduceaTDReverseDifferentialUpArrowThefollowingconditionsarenecessarytoproduceaTDreverseDifferentialuparrow:1.Theremusttwoconsecutivehighercloses,eachoneabovethepriorclose,2.Thecurrentpricebar’sbuyingpressuremustbegreaterthanthepreviouspricebar’sbuyingpressure,and3.Thesellingpressureforthecurrentpricebarislessthanthesellingpressureforthepreviousbar.tDanti-DifferentialUparrowHeadingintoaprospectivemarketbottom,threeconditionsmustbesatisfiedtogenerateaTDAnti-Differentialuparrow(Figure10.5).2400235023002250220021502100205012/2124272812/3123471/891011141/151617182007Figure10.5AProspectiveMarketBottomSuggestedbytheTDAnti-DifferentialUpArrowThedailychartofAstrazenecadepictsaprospectivemarketbottomsuggestedbytheTDAnti-Differentialuparrow:1)Therearetwoconsecutivelowercloseseach(relativetothepreviouspricebar’sclose),followedby2)ahighercloserelativetothecloseofthepreviouspricebar,and3)adowncloserelativetothecloseofthepreviouspricebar.10_Perl_ch10.indd1698/08/57:45:51PM 170DeMarkIndicators■ConditionsNecessarytoGenerateaTDAnti-DifferentialUpArrowTogenerateaTDAnti-Differentialuparrow,theremustbe:1.Twoconsecutivecloses,eachofwhichislowerrelativetothepreviouspricebar’sclose,followedby2.Ahighercloserelativetothecloseofthepreviouspricebar,andthen3.Adowncloserelativetothecloseofthepreviouspricebar.tDanti-DifferentialDownarrowHeadingintoaprospectivemarkettop,threeconditionsmustbesatisfiedtogenerateaTDAnti-Differentialdownarrow(Figure10.6).■ConditionsNecessarytoGenerateaTDAnti-DifferentialDownArrowTogenerateaTDAnti-Differentialdownarrow,theremustbe:1.Twoconsecutivehighercloses,eachofwhichishigherrelativetothepreviouspricebar’sclose,followedby2.Aclosethatislowerthanthecloseofthepreviouspricebar,andthen3.Aclosethatishigherrelativetothecloseofthepreviouspricebar.96.0094.0092.0090.0088.0086.0084.0082.0080.00161718197/202324252627307/311236Figure10.6AProspectiveMarketTopSuggestedbytheTDAnti-DifferentialDownArrowThedailychartofexxonMobildepictsaprospectivemarkettopsuggestedbytheTDAnti-Differentialdownarrow:1)Therearetwoconsecutivecloses,eachofwhichishigherrelativetothepreviouspricebar’sclose,followedby2)aclosethatislowerthanthecloseofthepreviouspricebar,and3)aclosethatishigherrelativetothecloseofthepreviouspricebar.10_Perl_ch10.indd1708/08/57:45:54PM chapter11TDWaldoPatternsAtaboutthetimeTomDeMarkpublishedhisfirstbook,TheNewScienceofTechnicalAnalysis,Iwashelpingtoorganizeacharityeventinmysparetime,acartoonauction,atChristie’sinLondon.ThefundraisingcommitteeandIwerereallyexcitedwhenweheardthattheworldrenownedauthorandartistMartinHandfordhadagreedtodonateoriginalartworkfromoneofhisWhere’sWally?books.TheWhere’sWally?cartoons(astheyarecalledintheU.K.),orWhere’sWaldo?(astheyareknownintheStates),depictbusycrowdscenes,oftencontaininghundredsofdifferentcharacters.ThechallengeforthereaderistofindWally,inhisroundglasses,stripedbobblehat,andT-shirt,whoishiddensomewhereamidthehustleandbustle.Iwasamused,therefore,whenTomDeMark’sbookpresentedaseriesofpricerelationshipsthathereferredtoasTDWaldoPatterns.Inmuchthesamewaythatyoucanfindthecartooncharacterifyoulookcloselyenough,youcanfindmeaningfulpatternsifyoucarefullyinspectapricechart,arguesDeMark.Hediscoveredatotalofsevenchartpatterns,whichhenumberedtwotoeight(don’taskmewhathappenedtonumberone).AswithmanyoftheTDindicators,youcanapplythesepatternstoanymarketortimeframe.■TDWaldoPatternTwoAprospectivereversalbarcanbeidentifiedwhen:1.Themarketrecordsafreshhighorlowforamove,butcloseshigherthanthefourpreviouscloses(forapotentialbase);17111_Perl_ch11.indd1718/08/57:46:23PM 172DeMarkIndicatorsOr2.Themarketcloseslowerthanthefourpreviouscloses(forapotentialtop);Or3.Thecloseofthetrendhighisgreaterthanthepreviouspricebar,orthecloseofthetrendlowislessthanorequaltothepreviouspricebar;AndAdowncloseoccursafterahighoranupcloseoccursafteralow,andtheclosefollowingthehighisgreaterthantheclosepriortothehigh,ortheclosefollowingthelowislessthantheclosepriortothelow.■TDWaldoPatternThreeFirst,Identifypricebarsthathavearangetwicetherangeofthepreviouspricebar.Toidentifynear-termupsideexhaustion,Addthatvaluetothecloseofthatbar.Toidentifynear-termdownsidepriceexhaustion,Subtractthevaluefromthecloseofthepreviousbar.Inaddition,Ifthemarketisadvancing,Thehighofthepreviouspricebarmustbeabovethehightwopricebarsearlier.Ifthemarketisdeclining,Thelowofthepreviouspricebarmustbebelowthelowtwopricebarsearlier.Movessuchastheseareoftenassociatedwithshort-termretardationofatrendor,attheveryleast,consolidationfollowingaperiodofstrengthorweakness.Note:Analternative,less-conservativeoptionissimplytodoubletherangeofthepreviouspricebar.■TDWaldoPatternFourforaProspectiveBottomTDWaldoPatternFourlooksforasituationinwhich:1.Thelowestprice(X)waspostedatleasttenbarspreviously,and2.Priortothatlow,allpriorlowswerehigher.11_Perl_ch11.indd1728/08/57:46:24PM TDWalDoPaTTerns173IfThenexttwopricebarsarebelowX,andbothhavelowerclosesthanthecloseofthepreviousbarclose,ThenThere’sareasonablechancethatthedownmoveisexhausted,andpricesarepredisposedtorally.Note:ThissecondcloserepresentstheTDWaldopatternbar.■TDWaldoPatternFourforaProspectiveTopTDWaldoPatternFourlooksforasituationinwhich:Thehighestprice(X)waspostedatleasttenbarspreviously,and,priortothathigh,allpriorhighswerelower.IfThenexttwopricebarsareaboveX,andbothhavehigherclosesthanthecloseofthepreviousbar,ThenThere’sareasonablechancethattheupmoveisexhaustednearterm,andpricesarepredisposedtodecline.Note:ThissecondcloserepresentstheTDWaldobar.■TDWaldoPatternFiveforaProspectiveTop1.Thecurrentbar’scloseshouldbeequaltothecloseofthepreviouspricebar,and2.Thecloseofthepreviousbarshouldbehigherthanthecloseofthebarbeforethat.■TDWaldoPatternFiveforaProspectiveBottom1.Thecloseofthecurrentbarshouldbeequaltothecloseofthepreviouspricebar,and2.Thepreviousbar’scloseshouldbelowerthanthecloseofthebarbeforethat.■TDWaldoPatternSixforaProspectiveBottomIf1.ThelowofbarXislowerthanalleightpriorlows,and2.ThedifferencebetweenthecloseandlowofbarXisgreaterthanthedifferencebetweenthecloseandthelowofthepreviousbar,11_Perl_ch11.indd1738/08/57:46:24PM 174DeMarkIndicatorsThenBarXqualifiesasthestartofapotentialupsidereversal.■TDWaldoPatternSixforaProspectiveTopIf1.ThehighofbarXishigherthanalleightpriorhighs,and2.ThedifferencebetweenthecloseandhighofbarXisgreaterthanthedifferencebetweenthecloseandhighofthepreviousbar,ThenBarXqualifiesasthestartofapotentialdownsidereversal.TDWaldoPatternSevencombinesbothareferencepricelevelandatimeconditiontoidentifyaprospectiveshort-termtrendreversal.■TDWaldoPatternSevenforaProspectiveShort-TermReversalForaPotentialBottom:ThemarketmustcloseabovetheclosefourbarspriortoaTDPointlow(thatis,alowflankedbyahigherlowtoitsimmediateleftandtoitsimmediateright).ForaPotentialTop:ThemarketmustclosebelowtheclosefourbarspriortoaTDPointhigh(thatis,ahighflankedbyalowerhightoitsimmediateleftandtoitsimmediateright).■TDWaldoPatternEightForaPotentialShort-TermTop:Thecloseofthecurrentpricebarmustbehigherthanallsevenpriorhighs,butlowerthantheclosefivebarsearlier.ForaPotentialBottom:Thecloseofthecurrentpricebarmustbelowerthanallsevenpriorlows,buthigherthantheclosefivebarsearlier.11_Perl_ch11.indd1748/08/57:46:25PM chapter12PuttingItAllTogetherOnceyouhavelearnedtheDeMarkstudiesandbecomeproficientusingthemasstandaloneindicators,therealchallengeistoapplythemtoreal-timetrading.AlthoughIdonotprofesstoknowalltheanswers,and,afterfourteenyears,stillfindmyselflearningnewthings,whatfollowsisanexampleofhowIliketocombinesomeoftheDeMarkindicatorstogetamacroinsightintowhatisgoingoninthemarketandhowthingsmightplayout.Oneexampleofawaytocombinetheindicatorsistolookatmultipletimeframes,asIdidwiththeUSDIndex(DXY)ofFebruary2007(seeFigures12.1–12.3).TheotherexamplerelatestotheU.S.dollarvs.theJapaneseyen(theUSDJPY,Figures12.4–12.8).Anumberoffactorsconspiredtosuggestthatthemarketwasabouttobase(thatis,thattheU.S.dollarwouldstrengthenagainsttheJapaneseyen)towardstheendofNovember2007.First,USDJPYcamewithinafewpipsoftheTDD-WaveFivedownprojectionat107.17(Figure12.4).Interestingly,thislevelwasveryclosetothemidpointofthe0.8919and0.8423downsideTDTrendFactorlevelsat107.61andtheTDMagnetPriceoftheTDRetracementArcat106.98fromJune22,2007(Figure12.5).ThelowinUSDJPYwasalsointhesamevicinityasthe0.764FibonacciretracementoftheJanuary2005tomid-June2007advanceat106.99,andthedownsideTDPropulsiontargetat107.34(Figure12.6).Atthesametime,themarketcompletedaTDComboBuy(VersionII)andaTDAggressiveComboBuy(Figure12.7),whilemoreconventional17512_Perl_ch12.indd1758/08/57:46:57PM TDSellSetupat91.57MONTHLYinNovember2005992.00058790.00046388.00086.0002184.000MonthlyTDSTsupportat81.2882.000Mar31Apr29May31Jun30Jul29Aug31Sep30Oct31Nov30Dec30Jan31Feb28Mar31Apr28May31Jun30Jul31Aug31Sep292005Figure12.1DXYUSDIndexMonthlyChartTDSellSetupWEEKLYat91.91in9November2005892.00075463290.0001WeeklyTDSTsupportat87.7588.00086.000ReinforceddowntrendafterbreakofTDSTsupport84.000Sep30Oct28Nov25Dec30Jan27Feb24Mar31Apr28May262005Figure12.2DXYUSDIndexWeeklyChart17612_Perl_ch12.indd1768/08/57:47:02PM DAILY86.000DailyTDSTresistanceat85.4891085.5008111311285.00067TDSequentialsellat85.12onFebruary12,2007584.50023872391484.000361452483.500243567683.00015788DailyTDSTsupportat82.3882.5009Nov22Nov30Dec8Dec15Dec22Jan8Jan15Jan23Jan31Feb7Feb14Feb21Feb28Mar8Mar15Dec292006Figure12.3DXYDollarIndexDailyChart025125BA1C12041153110107.18Marketbasedveryclosetothe0105107.18TDD-WaveFiveobjective5Jun15Jun29Jul16Jul31Aug15Aug31Sep14Sep28Oct15Oct31Nov15Nov30Dec14Dec31Jan152007Figure12.4USDJPYDailyChartwithTDD-Wave17712_Perl_ch12.indd1778/08/57:47:06PM 1240012300122001210012000119000.38211800117001160011500114000.61811300112001110011000Marketbasedveryclosetothe106.9810900TDMagnetPriceoftheTDRetracementArcoriginatingfromJune22,200710800Magnet10700JunJulAugSepOctNovDec1118250209162301061320270310172401081522290112192603101724Figure12.5USDJPYDailyChartwithTDRetracementArcSource:CQg,inc.©2008.Allrightsreservedworldwide.www.cqg.com.114.00112.00110.00108.00Marketbasedcloseto106.00TDPropulsionlevelat107.341314161920212326272829345610111213171819202125262711/1511/2211/3012/712/1412/24Figure12.6USDJPYDailyChartwithTDPropulsion17812_Perl_ch12.indd1788/08/57:47:16PM PuttingitAlltogether1791180011700121160012311500342Marketstalledaheadof114.9161140047891TDSTResistance1511300536411200711100858911000671090091010800TDAggressiveCombosignal(with11TDTerminationCountopensetting)at121310700107.42onNovember26,200710600NovDec2008152229011512192603101724310224Figure12.7USDJPYDailyChartwithTDAggressiveCombotechnicalanalysiswouldhaveshownabullish,engulfingcandlestickpattern(wheretheopen-closerangeonNovember26,2007,exceededtheopen-closerangeonNovember26).Atthesametime,theBKXIndex(theKBWBankIndex)generatedaTDSequentialBuysignal,andtheUBSFXRiskIndex(seesidebarforitscomponents)producedaTDSequentialSellsignal(Figure12.8).nTheUBSFXRiskIndexComponentsi/ii.Currencyvolatility,iii.TheViXindex,iv.gold,pricedineurosandu.S.dollars,v.Performanceofstocksrelativetou.S.Treasuriesonamonthlybasis,vi.Spreadsbetweenhighyieldsandu.S.Treasuries,vii.SpreadsbetweentheJPM(J.P.Morgan)eMBi1emergingmarketsindexandtheu.S.Treasurycurve,viii.ThemonthlyperformanceofutilitystocksrelativetoS&P500financials.12_Perl_ch12.indd1798/08/57:47:19PM 180DeMarkIndicators133.200TDSequentialsellsignalonUBSFXRiskIndexonNovember21,2007.Thissuggestedanunwind312ofriskaversionandrenewedappetiteforrisk.2.80010119132.6008*2.40097111122.20010525263234461*1.800457103111.60012912951.4006181.20048316774520.80038920.60010.400SepOctNovDec200813202703101724010815222901051219260310172402071421Figure12.8UBSFXRiskIndex:DailyChartwithTDSequentialSource:CQg,inc.Allrightsreservedworldwide.www.cqg.com.DatafromuBSAgAlthoughitissomewhatcounterintuitive,arisingindexsuggeststhatinvestorsarebecomingriskaverse,andadecliningindexsuggestsinvestorsarebecomingriskseeking.Intheexampleabove,itwassignificantthattheindexhadanactivesellsignalattheendofNovember2007,whichimpliedrenewedinterestincarrytrades(oneofwhichwasabullishUSDJPY).TheUSDJPYbuysignalwasfurtherreinforcedwhenitgeneratedaTDPriceFliponthecloseofNovember27(thatis,acloseabovetheclosefourpricebarsearlier)andsatisfiedtheconditionsforaTDReferencecloseonNovember28(whenthemarkettradedabovethehighestclosewithinthefourpricebarspriortothelowonNovember26).Interestingly,theensuingrecovery,whichwasarguablyaTDD-WaveIup,stalledaheadof114.91dailyTDSTresistance(theabsolutepricehighoftheTDSetupthatbeganonNovember5,2007).12_Perl_ch12.indd1808/08/57:47:24PM chapter13LearningtheDeMarkIndicatorsI’moftenaskedwhatistheeasiestwaytolearntheDeMarkindicators.Fortunately,it’sconsiderablyeasiernowthanwhenIfirststarted.(I’mnotlookingforsympathy—I’mgladIfoundoutaboutthemwhenIdidbecauseitmeantIhadaheadstartandcouldlearnthemfirsthandfromTom.)AllIhadtogoonthenwasDeMark’sfirstbook,TheNewScienceofTechnicalAnalysis(Wiley,1994),whichhadsomegreatideasbutwashardtofollow,becausehisworkwasn’tavailableinanyofthemainstreammarket-informationsystemsatthetime.It’sallverydifferentnow.Tomwroteanothertwobooks,NewMarketTimingTechniques(Wiley,1997)andDeMarkonDayTradingOptions(McGraw-Hill,1999),andtheDeMarkindicatorsarenowreadilyavailableontheBloombergProfessionalservice,andonAspenGraphics,CQG,ThomsonFinancial,andTradeStationsoftware.Thehelpguidesoneachofthesemarket-dataplatformsareexcellent.Eachhasitsrespectivemeritsbut,foreducationalpurposes,theBloomberghassomeparticularlygoodlearningaids,notablyTDCursorCommentary,whichenablestheusertoclickonapricebar,applyadatacursor,andseeaninterpretationbasedontheDeMarkstudiesappliedtothatchart.There’sevenaliveinstant-messagingservice,TDChat,inwhichTomDeMarkparticipates,toprovideactiveeducationalinsightintothereal-timemarketapplicationofhisstudies.Finally,onceyou’refamiliarwiththeDeMarkindicators,it’sworthtakingalookatTDRe-Search(TDRS),ascanfacilitythatenablesuserstosearchtheBloombergforDeMarkindicator–basedsignalsondaily,weekly,andmonthlytime18113_Perl_ch13.indd1818/08/57:49:48PM 182DeMarkIndicatorsframes.Alltheseservicesarebeingcontinuallyimprovedandrefined,tokeepupwithTomDeMark’sdevelopmentofhisindicators.nUsingTDCursorCommentary1.Launchapricechart.2.ApplywhicheverDeMarkindicatorsyouwanttouse.3.Then,clickonthegrayCommentarybutton.Nowyouwillbeabletouseyourmousetomovethecursortothebaryouwanttoanalyze.Ifyouclickonthatbar,apop-upwindowappears,providingasummarypagethatexplainstheindicatorconstruction,itscurrentindications,anditsimplicationsforthefuture.101.64009138121.620011671.60005411.580023345671.56008211.54009341251.5200Mar14Mar21Mar31Apr8Apr15Apr22Apr30May8May15May23May30FIgure13.1EURCADDailyChartwithTDSequentialFIgure13.2ANDFIgure13.3EURCADCurrencyAnalyses13_Perl_ch13.indd1828/08/57:49:53PM LearningtheDeMarkinDicators183TDRSenablesyoutoscanequities,equityoptions,creditandfixed-incomemarkets,ETFs,currencies,futures,andcommodities.Belowareinstructionsthatwillallowyoutoaccesstheservice(providedbyMarketsAdvisory,whichisTomDeMark’scompany).tDrSTypeTDRS,andselectyoursearchcriteria:IndicatorliststhevariousDeMarkstudiesthatyourscanscanbebasedon.Timeallowsyoutoselectfromdaily,weekly,ormonthly(withintradaytobeaddedsoon).Asset/Portfolioallowsyoutoselectfrom:•Auser-definedcustomportfolio•Activeworldmarkets•Equities(subdividedbycountry,U.S.equityoptions,ETFsbyregion,worldequityindexes,andcredit-defaultswaps)•Fixedincome•Futuresandoptionsoncommodities•ForeignexchangeScanOutput,underSymbols,showsthenumberofinstrumentsinthechosenassetclass.Double-clicktoviewthemineitheralphabeticalorchronologicalorder,andyouwillbeabletoviewthecurrentandpastfourdays’indicatorreadings.Clickonanindividualinstrument,andyou’llhavetheoptiontolaunchachartwithyourchosenTDindicatorapplied,andseeanindicatoroverviewandrelatednews/research.TheSpreadsheetViewoptionisparticularlyuseful;itdisplayssnapshotindicator-readingoverviewonmultipletimeframesforanumberofTDstudies.InadditiontotheTDChat,userscanalsocontactthefollowingBloombergapplicationsspecialistsforassistance:AsiaGreggTan,greggtan@bloomberg.netEuropeGuidoRiolo,guidoriolo@bloomberg.net13_Perl_ch13.indd1838/08/57:49:54PM FIgure13.4TDRe-SearchScreenFIgure13.5DeMarkIBChatScreenThescreenaboveisaninteractionbetweenTomDeMarkandBloombergproductspecialistrodBentley.TomandrodparticipateactivelyonTDChat’sDeMarkNoAdvice,answeringquestionsaboutthepracticalapplicationoftheindicators.ThechatisavailabletoallBloombergusersuponrequest.18413_Perl_ch13.indd1848/08/57:49:55PM LearningtheDeMarkinDicators185NorthAmericaRoderickBentley,rbentley@bloomberg.netDougTengler,dtengler1@bloomberg.netSpecificfunctionalityquestionsshouldbeaddressedtoeitherEugeneSorenson,esorenson1@bloomberg.net,whodevelopedthechartingfunctionalityatBloomberg,orRickKnox,rknox@capitalmarketsresearch.com,whodevelopedtheTDRSfunctionalitytoTom’sspecifications.StanYabroff,atCQG,isalsoafantasticresource.13_Perl_ch13.indd1858/08/57:49:56PM 13_Perl_ch13.indd1868/08/57:49:56PM IndexForthereader’seaseofuse,indexentriesarelistedwithoutthe“TD”designationthatisapartofthetrademarkednameofeachTDindicator.Thisomissioninnowayismeanttoimplythatthenameistobeusedelsewherewithoutitsfull,trademarkedappellation.AbsoluteRetracementBloombergProfessionalserviceforfunctionsotherthanprice,applicationsspecialists,contacting,113–114183,185settings,recommended,110TDChat,181,183AggressiveSequential,58TDCursorCommentary,181,182AlignmentTDD-Waveterminalsetting,87compositeindicator,toproduceTDPropulsionterminalsetting,122the,142TDRe-Search(TDRS),formulafor,141181–183,185overviewof,141TDSequentialterminalsetting,11settings,recommended,142–143“ThursdayNightTechnicals”Anti-Differentialsession,43downarrow,conditionsnecessaryBullishPriceFlip,4toproduce,170BuyCountdown,Combouparrow,conditionsnecessarytoless-strictversion,requirementsproduce,169–170for,61AspenGraphics,181longposition,enteringa,62overviewof,60BearishPriceFlip,2riskmanagementfor,62Bentley,Roderick,185SequentialBuyCountdownBKXIndex(KBWBankcomparedto,60Index),179strictversion,requirementsfor,6018714_Perl_index.indd1878/08/57:53:37PM 188IndexBuyCountdown,SequentialClopCamouflage,requirementsfor,25BuyCountdownrequirementsCancellationQualifierI,21–22for,25CancellationQualifierII,22SellCountdownrequirementsClop,requirementsfor,25for,38Clopwin,requirementsfor,26ClopwinComboBuyCountdownBuyCountdownrequirementscomparedto,60for,26completing,19–20SellCountdownrequirementsfrequentlyaskedquestions,28–29for,38initiating,17–18Combolongposition,enteringa,24–26Countdown,60–65Open,requirementsfor,26overviewof,59RecycleQualifier,22–23settings,recommended,66–67riskmanagementfor,26–27Setup,59–60,62terminationcountfor,26–27Countdown,ComboTrap,requirementsfor,26Buy,60–62validationrequirementsof,29,31Sell,63–65BuySetup,ComboCountdown,Sequentialoverviewof,59Buy,17–29,31,60requirementsfor,60frequentlyaskedquestions,47,BuySetup,Sequential49–52AggressiveSequential,using,58optimalnumbersfor,47,49interruptionof,4Sell,31,33–41,63–64overviewof,3Setupversus,17–20Perl’srulesfor,13CQG,181,185riskmanagementfor,14“perfection”of,9,11–12DemandLinestradingusing,12–14break,calculatingtheobjectivefor,96–97Camouflagedownsideviolation,determiningBuyCountdownrequirementsobjectiveforqualified,96–97for,25overviewof,92SellCountdownrequirementsqualifiercondition1,94–95for,37qualifiercondition2,95CancellationQualifierqualifiercondition3,96BuyCountdownconditionI,21–22shortposition,exitinga,97BuyCountdownconditionII,22DemandPoints,92–93,101SellCountdownconditionI,34–35DeMark,Nancy,47SellCountdownconditionII,35DeMark,TomChannelscontinuingdevelopmentoftocalculateChannelI,161–162indicators,182tocalculateChannelII,162DeMarkonDayTradingDeMarkand,162Options,181overviewof,160–161durationanalysisand,126–12714_Perl_index.indd1888/08/57:53:38PM Index189MarketsAdvisory,183DifferentialNewMarketTimingTechniques,181downarrow,conditionsnecessaryNewScienceofTechnicalAnalysis,toproduce,166The,69,171,181overviewof,165TDChannelsand,162uparrow,conditionsnecessarytoTDChat(Bloomberg)and,181produce,165TDD-Waveand,69,70,73–74,80,divergence,bearishversusbullish,12682–83Dow,Charles,70TDLinesand,91,93–94,96DowTheory,ElliottwavetheoryTDMovingAverageIand,145comparedto,70–73TDMovingAverageIIand,145durationanalysis,DeMarkand,126–127TDPointsand,91D-WaveTDPressureand,137–139advantagesofusing,87–88TDRangeExpansionBreakoutbearmarketpriceprojections,80,(TDREBO)and,15982–83TDRangeExpansionIndex(TDBloombergterminalsetting,87REI)and,127,129bullmarketpriceprojections,78,80TDRangeProjectionand,153,155calculatingprojections,78,80,82–83TDRe-Search(TDRS)closingprices,using,82(Bloomberg)and,185DeMarkand,69,70,73–74,80,82–83TDRetracementsand,103,105,downtrend,additionalqualifiers107,109,111–113for,77TDSequentialand,1,12,14,20,Elliottwavetheoryand,69–70,73–7825,26,28,33,36,47,48frequentlyaskedquestions,83–84,TDToleranceLeveland,15586–89TDTrendFactorand,115overviewof,69TDWaldoPatternsand,171RelativeStrengthIndexand,DeMarkerI83–84,86buy,otherconditionsnecessaryforsettings,recommended,89–90prospective,134tradingusing,86–87denominator,toarriveatthe,133uptrend,additionalqualifiersfor,formulafor,13376–77numerator,toarriveatthe,133D-Wave1overviewof,133bullmarketpriceprojections,78sell,otherconditionsnecessaryforrequirementsfor,74prospective,135D-Wave2settings,recommended,135bearmarketpriceprojections,82DeMarkerIIbullmarketpriceprojections,78denominator,toarriveatthe,requirementsfor,74136–137D-Wave3numerator,toarriveatthe,136bullmarketpriceprojections,78overviewof,135requirementsfor,74–75settings,recommended,137D-Wave4DeMarkonDayTradingOptionsbullmarketpriceprojections,78,80(DeMark),181requirementsfor,7514_Perl_index.indd1898/08/57:53:39PM 190IndexD-Wave5otherusesfor,148–149bearmarketpriceprojections,82overviewof,145–146bullmarketpriceprojections,80prospectivebearishtrend,todownsidetargetfor,83identify,146–147requirementsfor,75prospectivebullishtrend,toupsidetargetfor,80identify,146D-WaveA,requirementsfor,75settings,recommended,149D-WaveB,requirementsfor,76MovingAverageIID-WaveCDeMarkand,145bearmarketpriceprojections,82overviewof,149–150downsidetargetfor,80RateofChange(ROC)with,requirementsfor,76150–151upsidetargetfor,83movingaveragesoverviewof,145Elliott,RalphNelson,70TDMovingAverageI,145–149ElliottwavetheoryTDMovingAverageII,145,149–151DowTheorycomparedto,70–73TDD-Waveand,69–70,73–78NewMarketTimingTechniqueswave1,71(DeMark),181wave2,71NewScienceofTechnicalAnalysis,Thewave3,71(DeMark),69,171,181wave4,71–72waveA,73OnBalanceVolume(OBV)indicator,waveB,73137–139waveC,73OpenBuyCountdownrequirementsfor,26Fibonaccinumbers,47,54,115SellCountdownrequirementsfor,38oscillatorsHandford,Martin,171overviewof,125–127KBWBankIndex(BKXIndex),179RelativeStrengthIndex(RSI),6,Knox,Rick,18583–84,86,125TDAlignment,141–143LinesTDDeMarkerI,133–135Demand,92,94–97TDDeMarkerII,135–137DeMarkand,91,93–94,96TDPressure,137–140overviewof,91–94TDRangeExpansionIndex(TDsettings,recommended,101–102REI),127–130,132Supply,92–93,97–101TDRateofChange(TDROC),140MagnetPrice,103–105PointsMarketsAdvisory,183Demand,92–93,101MovingAverageIDeMarkand,91bearish,plotting,147–148overviewof,91–93bullish,plotting,146Supply,91,93,101DeMarkand,145POQ.SeePriceOscillatorQualifier14_Perl_index.indd1908/08/57:53:39PM Index191PressurescenariosandhowtocalculateDeMarkand,137–139them,154–155,157OnBalanceVolume(OBV)ToleranceLevel,155,157indicator,137–139RateofChange(ROC)overviewof,137formulafor,140settings,recommended,139MovingAverageIIwith,150–151PriceFlipoverviewof,140Bearish,2settings,recommended,140Bullish,4REBO.SeeRangeExpansionPriceOscillatorQualifier(POQ)Breakoutbuysignal,toinitiatea,130RecycleQualifieroverviewof,129BuyCountdown,22–23sellsignal,totriggera,130SellCountdown,35PropulsionREI.SeeRangeExpansionIndexadvance,defininginitialthrustlevelRelativeRetracementsfor,122downsidebreakofalevel,conditionsBloombergterminalsetting,122forqualifying,107–108decline,defininginitialthrustleveldownsideviolations,scenariosfor,109for,122forfunctionsotherthanprice,overviewof,121113–114settings,recommended,123–124projecting,determiningreferencesPropulsionDown,121,122for,103–104PropulsionDownTarget,121reversal/consolidationpattern,PropulsionUp,121,122another,109PropulsionUpTarget,121settings,recommended,108shortposition,exitinga,108RangeExpansionBreakout(REBO)upsidebreakofalevel,conditionsdailypricebars,toapplyto,forinvalidating,107158–160upsideviolations,scenariosfor,109DeMarkand,159validatingalevel,conditionsfor,overviewof,157–158106–107RangeExpansionIndex(REI)whennottouse,109–110buysignal,toinitiatea,130RelativeStrengthIndex(RSI),126conditionalformulasfor,130,132calculationfor,125DeMarkand,127,129TDD-Waveand,83–84,86formulafor,128–129TDSequentialand,6overviewof,127Retracement(s)PriceOscillatorQualifier(POQ),Absolute,110,113–114129–130Arcfor,111–114sellsignal,totriggera,130DeMarkand,103,105,107,109,settings,recommended,132111–113value,establishinga,129MagnetPrice,103–105RangeProjectionoverviewof,103DeMarkand,153,155Relative,103–104,106–110,overviewof,153–154113–11414_Perl_index.indd1918/08/57:53:40PM 192IndexRetracementArcSellSetup,Sequentialfordownsideretracements,112AggressiveSequential,using,58forfunctionsotherthanprice,BullishPriceFlip,4113–114interruptionof,4–5forupsideretracements,111overviewof,4ReverseDifferential“perfection”of,14downarrow,conditionsnecessaryPerl’srulesfor,16toproduce,167riskmanagementfor,17overviewof,167tradingusing,14,16–17uparrow,conditionsnecessarytoSequentialproduce,169Aggressive,58RinaSystems,49Bloombergterminalsetting,11Riolo,Guido,183completionoffirstphaseof,4ROC.SeeRateofChangeconventionalmomentumindicatorsRSI.SeeRelativeStrengthIndexversus,6–8Countdown,17–29,31,33–41,47,SellCountdown,Combo49–52,60,63–64less-strictversion,requirementsDeMarkand,1,12,14,20,25,26,for,6528,33,36,47,48riskmanagementfor,65–66frequentlyaskedquestions,46–52,54SequentialSellCountdownoverviewof,1–2comparedto,63–64RelativeStrengthIndexand,6strictversion,requirementsfor,riskmanagementfor,4964–65settings,recommended,57–58SellCountdown,SequentialSetup,2–9,11–14,16–20,47,Camouflage,requirementsfor,3751–52,58CancellationQualifierI,34–35timeframes,combining,43–44CancellationQualifierII,35Setup,ComboClop,requirementsfor,38Buy,59–60Clopwin,requirementsfor,38overviewof,59ComboSellCountdowncomparedSell,62to,63–64Setup,Sequentialcompleting,31,33BearishPriceFlip,2frequentlyaskedquestions,39–41Buy,3–4,9,11–14,58Open,requirementsfor,38Countdownversus,17–20overviewof,31frequentlyaskedquestions,47,RecycleQualifier,3551–52requirementfor,31optimalnumbersfor,47riskmanagementfor,39,41overviewof,2shortposition,enteringa,35–38Sell,4–5,14,16–17,58terminationcountfor,38–39SetupTrend,5–9Trap,requirementsfor,38SetupTrend,Sequentialvalidationrequirementsof,41confirmedtrendextensionand,8–9SellSetup,Combo,requirementconsolidation/reversalscenario,6–8for,62overviewof,5–614_Perl_index.indd1928/08/57:53:41PM Index193short-termindicatorsSellCountdownrequirementsTDAnti-Differential,169–170for,38TDDifferential,165–166TrendFactorTDReverseDifferential,167,169bottom,determininga,118Sorenson,Eugene,185DeMarkand,115Stendahl,David,49frequentlyaskedquestions,120SupplyLinesoverviewof,115–116break,calculatingtheobjectivetop,determininga,116,118for,100longposition,exitinga,100–101USBFXRiskIndex,52,114longposition,qualifier1forcomponentsof,179initiatingfresh,98–99USDIndex,43–44,175longposition,qualifier2forUSDJPY,175,179–180initiatingfresh,99longposition,qualifier3forVIX,114initiatingfresh,100overviewof,92–93WaldoPatternsqualifiers,97–101DeMarkand,171SupplyPoints,91,93,101overviewof,171WaldoPattern2,171–172Tan,Gregg,183WaldoPattern3TDChat(BloombergProfessionaldownsidepriceexhaustion,toservice),183identifynear-term,172DeMarkand,181upsidepriceexhaustion,toidentifyoverviewof,181near-term,172TDCursorCommentary(BloombergWaldoPattern4Professionalservice)bottom,foraprospective,172–173overviewof,181top,foraprospective,173using,182WaldoPattern5TDRe-Search(TDRS)(Bloombergbottom,foraprospective,173Professionalservice)top,foraprospective,173DeMarkand,185WaldoPattern6overviewof,181–182bottom,foraprospective,173–174using,183top,foraprospective,174Tengler,Doug,185WaldoPattern7ThomsonFinancial,181bottom,foraprospective,174ToleranceLeveltop,foraprospective,174DeMarkand,155WaldoPattern8downside,155bottom,forapotential,174upside,155,157top,forapotentialshort-term,174Toth,David,20Where’sWally?(Where’sWaldo?)TradeStation,181Handford),171TrapWilder,Welles,83BuyCountdownrequirementsfor,26Yabroff,Stan,18514_Perl_index.indd1938/08/57:53:41PM AboutBloombergBloombergL.P.,foundedin1981,isaglobalinformationservices,news,andmediacompany.HeadquarteredinNewYork,Bloomberghassalesandnewsoperationsworldwide.Servingcustomersonsixcontinents,Bloomberg,throughitswhollyownedsubsidiaryBloombergFinanceL.P.,holdsauniquepositionwithinthefinancialservicesindustrybyprovidinganunparalleledrangeoffeaturesinasinglepackageknownastheBloombergProfessional®service.Byaddressingthedemandforinvestmentperformanceandefficiencythroughanexceptionalcombinationofinformation,analytic,electronictrading,andstraight-through-processingtools,Bloomberghasbuiltaworldwidecustomerbaseofcorporations,issuers,financialintermediaries,andinstitutionalinvestors.BloombergNews,foundedin1990,providesstoriesandcolumnsonbusiness,generalnews,politics,andsportstoleadingnewspapersandmagazinesthroughouttheworld.BloombergTelevision,a24-hourbusinessandfinancialnewsnetwork,isproducedanddistributedgloballyinsevenlanguages.BloombergRadioisaninternationalradionetworkanchoredbyflagshipstationBloomberg1130(WBBR-AM)inNewYork.InadditiontotheBloombergPresslineofbooks,BloombergpublishesBloombergMarketsmagazine.TolearnmoreaboutBloomberg,callasalesrepresentativeat:London:+44-20-7330-7500NewYork:+1-212-318-2000Tokyo:+81-3-3201-8900SUBSCRIBETOBLOOMBERGMARKETS&GETAFREEISSUEThemagazineforandaboutpeoplewhomovemarkets.•Freeissueplus12morefor$19.95•Savemorewithtwoyearsfor$29.95TosubscribetoBloombergMarkets,goto:www.bloomberg.com/news/marketsmag/15_Perl_about.indd1948/08/57:55:28PM AbouttheAuthorJasonPerlisglobalheadofFixedIncome,Currencies&CommoditiesTechnicalStrategyatUBSInvestmentBank.HejoinedUBS’sFXTechnicalStrategyGroupinLondoninJuly2000,andhasbeenrunningthegroupsince2004.PriortojoiningUBS,hewasanindependentconsultantinseveralareas:advisingproprietarydesksandhedgefundsonshort-termtradingstrategies,helpinginstitutionalinvestorswithtrading-systemdesignanddevelopment,andactingastechnicalstrategyadvisertoanumberoflargefinancialdatavendorsandascontributingeditorforFutures&OptionsWorld,FX&MM,andtheInternationalPetroleumExchange’s(IPE)Pipelinemagazine.Perl’sareaoftechnicalexpertiseistheDeMarkindicators,whichhehasbeenusingforthepastfourteenyears.Inhiscurrentrole,heandhisteamprovidebothshort-andmedium-termtradingstrategiestocentralbanks,hedgefunds,institutionalinvestors,andwealthmanagersaroundtheworld;andgeneral,specialist-educationtechnicalanalysistraining.RobinHoodFoundationAportionoftheadvancereceivedbytheauthorforthisbookgoestotheRobinHoodFoundation.RobinHoodchangesfatesandsaveslivesinNewYorkCitybyapplyinginvestmentprinciplestocharitablegivingandsupportingthemosteffectivepoverty-fightingprogramsinallfiveboroughs.Gotowww.robinhood.org.15_Perl_about.indd1958/08/57:55:28PM