Overbought/Oversold:
DeMARK Indicators:
Tom DeMark’s TD Sequential:
This indicator identifies a turning point in a price trend for a security. It does this by running count of price bars to gauge trend exhaustion.
The set-up and countdown for this indicator is as follows:
A buy set-up occurs when the previous 9 bars each close below the bar 4 bars prior to it. It is said to be perfect if the 8th or 9th bar close below the previous 7 or 8 bars. A buy set-up requires a bearish price flip as well. Should one of the bars close higher than the previous few, the TD setup requires one to wait for the next price flip to start count again.
For the TD Buy Countdown, the close of the ninth bar must be lower than the previous two bars. If this is the case, bar 9 becomes bar 1 of the TD Buy Countdown. Once that is complete, the TD Buy Countdown begins.
The countdown must include 13 bars that each close below the low of the two bars earlier. Unlike the buy-set up, this does NOT have to be consecutive. One would continue counting until the countdown qualifier (bar 13 must be less than or equal to bar 8) or until the countdown cancellation (a sell setup appears or recycle occur). A break of the TDST line can also cause a countdown cancellation.
The TDST line, or the Tom DeMARK Set-Up Trend, is the high of the true range of bar 1 of the buy set-up mentioned in the first bullet point. “True range” indicates that every gap is automatically assumed to be filled.
The TD Sell Set-up and the TD Sell Countdown is the same as above but in the opposite direction (when the bars close above).
The TD Sequential is one of few coincident indicators of inflection points.
Tom DeMark’s TD Combo:
This is a more stringent version of the TD Sequential indicator. It has the same set-up as the TD Sequential, however, the countdown does not start at bar 9 after the set-up; the countdown starts at bar 1 of the set-up.
The TD Combo Buy Countdown has three requirements:
The low of the countdown day must be lower than the previous 2 bars.
The close of the same day must be lower than the previous days’ close.
Bars 11,12, and 13 should each close lower than each other successively.
TD Combo Sell is the same as above but in opposite direction.
These indicators help determine the inflection points in the market. They tend to help many investors decide when to enter the market and when to exit.
Stochastic Oscillator:
This is a momentum indicator that compares the current close (or a particular price) of a security to a specified range of prices for that same security.
This oscillates between 0% and 100%, where 80% and above correlates to overbought and 20% and below correlates to oversold.
Crossovers generate “buy” and “sell” signals, and many sell when it is overbought (above 80%). Likewise, investors tend to buy when it is below 20%.
The formula is:
(Current Close - Lowest Price) X 100
(Highest Price - Lowest Price)
where “LOWEST PRICE” is the lower bound and the “HIGHEST PRICE” is the upper bound of the security price in the last ‘n’ periods.
Relative Strength:
Relative Rotation Graph:
A Relative Rotation Graph enables visualization of Relative Strength and sector rotation. This can illustrate the momentum for different securities.
Analysis is achieved by noting the trajectory of each security in the four quadrants.
Securities that have strong relative strength and momentum are usually graphed in the green Leading quadrant (top-right). These are securities that are outperforming the benchmark.
The yellow Weakening quadrant are securities that are outperforming the benchmark, but have deteriorating momentum (lower-right).
Next, the red Lagging quadrant typically holds securities that are underperforming the benchmark (lower-left).
Finally, the blue Improving quadrant holds the securities that are still underperforming but have momentum that is improving (top-left).
Relative Strength Comparative Ratios:
Price (ABC)/ Price (XYZ) = Relative Strength of ABC vs XYZ.
This ratio helps identify the strong stocks in the strong groups and the weak stocks in the weak groups. It overall may identify when to buy or when to sell.
These ratios may also reveal inter-market relationships and shifts in leadership.
Finally, very long term analysis may dictate a price performance ratio.
Trend-Following:
MACD - Moving Average Convergence/ Divergence:
The MACD is a trend following momentum indicator that shows the relationship of two moving averages of prices.
The standard method for calculating this is to find the difference between the 26-period and the 12-period exponential moving averages. The 9-period moving average is used for signals. When the MACD crosses above this line, the market is regarded to be bullish.
Divergences can be telling, but they are not always good market timing devices.
Alternative calculations include finding the difference between 100-period moving average and 21 period moving average. The 200-period moving average is used for signals in this case. This replicates the weekly MACD on a daily chart.
Click here for Moving Averages
