Tutorial DeMark (c) Indicators
The foundation and most famous of the DeMark (c) indicators are the setups and countdowns, the “9s” and the “13s” you see discussed on tv.
The “13s”, Sequential and Combo, tries to identify points of exhaustion in the market. This occurs when everybody has bought or sold and the market then should reverse from a lack of buyers or sellers. We always say “Markets top on good news and bottoms on bad” and not the other way around. When sentiment is bearish, markets reverse higher and vice versa.
When looking at a market from a DeMark perspective, we try to conclude if the market is trending or not. This is done by identifying a “price flip” which is a close or sell that is below or above the close 4 bars ago.
The price flip is the first part of a Buy- or Sellsetup. A buysetup is a move lower that leads to a buy and vice versa. There is difference in how they work but they both apply the same rules.
In order to record a Buysetup (here we use a Buysetup as example) the first step is a Bearish price flip.
The Bearish price flip is a close below the close 4 bars ago and an 1 appears below the pricebar. When this occurs the market might be starting to trend. However, in order to get to a Buysetup, this has to occur for 9 consecutive days, else it is cancelled and a Setupcount starts the other way, into a Sellsetup.
A sequence of 9 lower closes than the bar 4 ago must then be seen and the buysetup is recorded. At any point it closes above the close 4 bars ago the count is cancelled and Bullish price flip is seen and a 1 appears above the price bar for the Sellsetup.
When the count goes to 9, it is finished and the Buysetup has recorded. This is crucial to our work.
The recording of the Buysetup leads to one of the more important indicators, it creates the TDST. TDST is crucial resistance for a buysetup (support for a Sellsetup) and considered inflection point for a momentum break. As long as the market is contained within TDST, the market is rangebound whereas a break of TDST is the momemtum trigger.
At the bar 1 high (second chart) the TDST is created and from now represents TDST resistance, blue line.This and the local high in the Setup, in this case the bar prior to 1.
On this chart TDST and TD Sequential only. Sequential is the most known indicator the 13 (with Combo the second and the less know aggressive settings)
Daily TDST created at high (also in this chart the marked bottomed at TDST support, red line created from the previous Sell setup)
Daily TDST created at high (also in this chart the marked bottomed at TDST support, red line created from the previous Sell setup)
The setup is the trend and the count, although no more numbers are showed after the 9, can go on forever.
When a setup is recorded one should look for 1-4 bars reaction but inside a range, the expectation is to move into another setup towards the newly created TDST.
This is clear in the chart below showing the days leading up to the price flip and buysetyp .
A Sell setup had created Daily TDST support at the Low of bar 1.The went on to record the buysetup showed in charts above and then tested the TDST took off higher.
The move prior to price flip and buysetup had created TDST support that was tested and held.Expectations are then for the move to reverse inside a range.
Note also that TDST is the level to watch and the ones waiting for the previous lows prior to the sellsetup waited for a long time.
This test of TDST shows one important “rule” that is not but good to keep in mind.
A buysetup recorded well above TDST support is riskier as the TDST often is tested and the buysetup entry is too wide.
In short this means that a setup close to TDST that closes within the level is good to act on.
Following the buysetup and the test of TDST the market then went up to test the TDST resistance.
A new sell setup recorded right at TDST resistance and such creating a new TDST support (1105 here).
When this new Sellsetup is recorded the old and tested TDST is cancelled.
Note that the dots stop, that is because as long as active a new dot for each day is added.
This is always the most recent active indicator no matter what.
From now on the Daily TDST support is derived from the recent sellsetup.
This is crucial as the previous has lost any significance and meaning.
Following the recording of a Setup the exhaustion count begins. This is always the case on any setup recording.
There are two basic exhaustion signals, Sequential and Combo.
Both exhaustion signals runs to 13 and unlike the Setup the bars don´t have to be en consequitive order.
The only rules we use are (they are optional but for bigger moves we believe they are best)
The bar 8 Close has to be above the Bar 5 close And
Bar 13 High has to be above the Bar 8 Close.
There are a big different between the two but we begin with Sequential.
An exhaustion bar of a sell signal is a close above the high 2 bars ago and if so a 1 appears above the bar 9.
If bar 9 is not above the bar 2 days prior (bar 7) nothing shows and the count continues until the condition is filled.
This is the only condition for a Sequential, a Close above the High 2 bars ago.
Sequential Bar 1 records as Close > 2 bars ago records 1. 6 Close > 2 days (that is also bar 4 of Sequetial).
After bar 7 the count pauses as sideways and no close above the high 2 bars earlier.
Green circles do Not record even though good upside.
Bar 8 records 7 trading days after bar 7 and could in theory record a year later if the market starts going sideways.
Following the TDST test and the new Sell setup record the market then broke the TDST resistance and started the Sequential countdown.
It started trending higher although not a very sharp move and went on to record the 13 Sequential sell setup.
The 13th and final bar created Risk Level (that is the highest bar added to bar 13) and is considered more or less a stop loss.
If this level is taken out the Sequential is no longer valid.
The Risk Level is often a very good level to act against given certain conditions.
The bar 13 is recorded At Close although one can use Open restriction for more aggressive and minimize to risk to miss a countdown.
Both the Close and Open condition requires that they are above the high 2 bars ago.
Sequential 13 recorded and Risk level is then tested already the next day. See the 13 is at 1195 (entry) but it traded at 1215 two days after.
Making life easier for shorts the market made a Bearish Price flip and went on to complete a Sell Setup almost the same day as the
Why is this important? The absolutely number one factor is that it created a new TDST support and then 1105 loses its importance.
The Sequential 13 completion should then lead to a reaction within 12 bars.
This means there is two basic cancellations of the Exhaustion countdowns (Combo has the same)If no reaction is seen after 12 bars or the Risk level is broken means the market is too strong (or weak on a Sell exhaustion).
The Sequential Risk Level remained unbroken (dotted blue Line) an the market reacted and sold off sharply.
Daily TDST created by the latest Sell Setup was not broken at first and the market came back up (more on breaks below)
It closed above TDST and then turned lower,broke TDST (Now filled line) and saw a Bearish Price Flip.
Back to Setups and the use:
As TDST support was broken and this is the next important rule on TDST and Setups:
If the TDST breaks early in the Setup, above the bar 1 of the Buysetup was recorded the day After the break, it is a strong signal. Above very valid.
The expectation of an early break of a TDST (or a good break late or after) is that the markets goes on to complete a full Exhaustion countdown.
That is the Setup that breaks TDST (or after) is expected to go into a full Exhaustion 13 countdown.
This means that it If there is more setups active with countdowns the ones that broke TDST is still the one expected to complete.
The market went on to record a Buysetup with expectations of a 1-4 bar reaction.
However, as TDST support was broken early, expectations are for a Full countdown 13. The market bounced higher but then turned
sharply lower into another Buysetup creating new TDST resistance (that then holds)
The market completes the Sequential 13 Exhastion buy.
Notice that the 13 is not the low but the Buysetup marked the low. Also 13 low is below the bar 8 close.
The TDST created from the above Buysetup at 1130 held the reaction from the Sequential 13 buy and…
Market then turns sharply lower recording a secondary Sequential but also a new Buysetup that creates new TDST resistance.
The reaction from the latest Sequential is violent and records a Sell setup the breakd TDST early.
With that expectation is for the market to complete a full Sequential Countdown and it does.
On the way Daily TDST support moves higher without resistance- Daily TDST from the latest Buysetup is broken.
Ofcourse the whole move came in the shape of a IHS bottom and a false bigger H&S top.
Big Head and shoulder tops that goes into an Inverted H&S bottom.
Market runs relentlessy with several Sell setups before entering a new range and ta the end daily TDST is broken once again.
The break is early in the Setup and thus expected to complete and the market bounce after the new Buysetup but fails TDST resistance and
The only thing that can prevent the Exhaustion count is ofcourse the recording of a Setup the opposite direction.
As there can only be one active Setup (but it is possible to see the Countdown record on the bar 9 with Ope restriction)
The Combo Exhaustion count differs from Sequential in that it is more aggressive and starts from Setup Bar 1 and not 9.
It will thus show up with every Setup until canceled (Price flip the oposite way)
It also requires that each Exhaustion bar Close is higher than previous Combo bar. A bar can thereofor fulfill the condition
with a close higher than the High 2 bars ago but as it is now above the previous Combo bar , nothing is recorded.
Bars 11,12 and 13 is different and only looks for the close to be higher than the previous close.
The market starts trending recording a Sell setup and Combo with it. The market goes sideways into bar 9 and then does not record the
10th bar until much later. Aside from the condition of having a higher close than ther previous Combo bar the market fails to
see a close above the high 2 bars ago.
The market runs into a 13 Combo Exhaustion sell, test Combo Risk (same as Sequential) but fails to react much.
When recording both Exhaustion (basic) signals the market is more prone to a reaction.
When they differ in time Combo is often the high momentum low and Sequential the price low.
That is the basic though anyway.
There are a few additional things to watch in form of rules regarding Countdowns.
When a 13 signal is recorded the highest Close 4 bars prior to the 13 serves as confirmation level.
When a close is seen below this Reference level the Countdown signal is confirmed and a failure to do so often sees violent reactions the other way
There are also instances when the Setup 9 continues to trend and although no further number is displayed, it is counted.
If this continues with 22 (or 18 or 20 depending on user) close below the close 4 bars ago, the market is in a very strong trend.
This will Rycycle the Countdown and it is considered invalid. An R will show in the chart until a good Countdown.
However, sometimes a 55 count (that is long) is used as exhaustion but it is rather uncommon.
Also, Buy Exhaustions works much better than Sell exhaustions. We believe this is due to the fact that selling panic is more common and as the 13 Buy represents when everybody has sold, it is more natural that it work.
The most important thing with counts is to figure out when the market is trending and when it is in range. We believe that the Counts are quite low on the list of indicators to follow and that people most of the times use them in the wrong way.
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