Tuesday, January 01, 2008

TD Sequential Details Explained

A reader just left a comment asking me about the TD Sequential buy signal I posted for Cisco. Instead of just replying, I decided to dedicate an entire post to the question because it points out a common occurrence in TD Sequential analysis and highlights the importance of using all of Tom DeMarks techniques.

Basically the question was, shouldn't the TD buy setup be ignored because it was followed by another TD sell setup? In most cases this would be true, but the CSCO chart is an excellent example of when one should ignore a setup.

First, there has to be a confirmed break above the intraday true high of the buy setup for the preceding setup to be voided. Quoting from New Market Timing Techniques, "to confirm a TDST upside breakout indication, first of all, the opening price on the trading day following a TDST breakout must NOT record a gap downside, and the high on the day following the TDST breakout MUST BE succeeded by a higher high." As you can see on the chart above, CSCO closed above the TDST buy line on Nov 6th and did not gap down on the following day. However, it did not record a higher high on Nov 7th, thus nullifying the TDST breakout.

Quoting DeMark again, "It is possible that the forces of supply and demand may have been been in disequilibrium the previous trading day and, as a result, the closing price may have misrepresented the true dynamics of the market at the time of the market's close."

How true this turned out to be when the Cisco came out with earnings and warned about slowing US sales the day after the failed TDST breakout.

The second reason why I ignored the TD Seq sell setup is because there was no obvious continuation of the upward trend that should follow a real TD Seq sell setup. This was confirmed when there was confirmed break below the red TDST sell setup line. If you happen to have DeMark's book, look to Figure 2.10. It shows the price action of Dec 96 Gold and displays many of the details explained above.

One other thing about the CSCO chart. The day after the original post it perfected the TD Sequential buy signal. The stop loss is now triggered by a close below 26.48. This looks like a very low-risk trade.

The cool thing about DeMark is that he has already run into and analyzed just about every issue that one might face when using TD Sequential. There is no need to reinvent the wheel.

I hope my explanation was clear. If not, do not hesitate to ask a follow-up question.


astrowillie said...

Your explanation was crystal clear, and I really appreciate your effort.

I know DeMark's intentions were always to have an absolutely objective system. Clearly, I need to become better familiarized with all of the rules.


Paul Stiles said...

You are exactly right about DeMark's goal of total objectivity. I think he was frustrated by TD Sequential and some of its ambiguous signals, the most problematic being the problem of "recyling". I guess that is why he came up with TD Combo.

Good luck and keep an eye on Cisco. It looks like it isn't going to hold its stop loss point.