Downey on Trends, Apple, and Signal Qualification: Qualifying TD Sequential®, Part 2

The Market Studies community size is a testament to both the success and popularity of the Tom DeMark suite of indicators. This means that many in the professional community are aware, via chat and forums, when major signals are building in the most popular and closely-followed markets, even if they do not have the studies themselves. This leads to a powerful crowd-following element. However, this does not mean that potential turning point calls should be followed without careful and considered analysis plus a tried and tested signal qualification technique. No indicator can be correct all of the time.

Now I may not be a trucker, but I do know that you shouldn't stand in front of the truck. Herein lays one of the problems that needs to be overcome when qualifying signals. An inability to do so will lead to you constantly ignore the dominant trend, which not only means that you are missing a great opportunity to ride on the truck, but you are also constantly getting run over by it. The higher the time frame, the bigger the truck and the more it's going to hurt.

Apple is an extreme example, but it's easy to get caught in the trap that it just can't go up forever (see below). For what it's worth, March 15 was the first sign in my analysis that resistance based on its own momentum was beginning to build. One extra tool I use is computing volume for the time of day against its long-term average. It has reached unprecedented levels, which highlights the fact that a major tug-of-war between bulls and bears is unfolding. This sort of volume analysis can help qualify any completed Countdown®.

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Apple daily chart. Standing in front of the truck. The vast majority of these raw TD Sequential signals were never qualified.

My analysis over many years has confirmed that for intraday data, a typical new trend will begin with a length of between twenty and twenty-five bars before a corrective phase begins. This lends itself to thinking that Combo®, which allows Countdown to begin within a Setup® phase, will do a better job of spotting trends that are overextended and at least due a corrective phase. Sequential requires a minimum of twenty-two bars in the first phase and would have to be true on a consecutive basis on Countdown in order to fulfill that minimum number. In fact, my own extensive testing in Entry Signal Evaluator shows that Combo is consistently a better performer.

If you combine this with analysis in cycle length, the chance of success increases. This can be done by more complicated calculations such as Ehlers' or Hilbert's sine waves, or by more common methods such as Elliot Wave linked to Fibonacci time cycles. I like to keep things simple, so a single complete trend cycle, including corrective phases, must be at least sixty-five bars or multiples thereof. Therefore, a Sequential signal that is at or beyond a full cycle has a greater level of importance in confirming whether a trend is over. There are three major caveats: First, is the ability to quantify whether the market is also overbought or oversold, which we will look at in another article. Second, what is the HiCount/LoCount setup (see Redefining Swing Patterns articles)? Third, and most important, is that this theory, especially on daily data, requires extra qualification rules when applied to individual stocks. Apple is a sobering reminder of how stocks can trend for an extended period of time

There are other established ways to qualify, and a popular method is to use the Setup Trend (TDST)®. There are many schools of thought, but here are my preferences: First, any thirteen in an uptrend must be lower in value than the previous beginning (number one) of a Setup in the opposite direction. Second, the thirteen must be above the Setup line, but the reversal is confirmed when price closes below the Setup line in the opposite direction. The chart on the S&P shows two examples where neither reversal signal was qualified, so no move to exit a trend-following position or a new short position was instigated.

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Read the Qualifying TD Sequential®, Part 1 article.


Shaun Downey is a technical analyst and author of the books Trading Time and Mapping Your Voyage of Discovery. He can be reached here.

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Technical Analyst at CQG and author of the book 
Trading Time. He can be reached at shaun.downey@btopenworld.com.

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