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Five Things You Need to Know: The Case Against the Low

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Why the low may not yet be in place

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:


Let's cut the chase, skip to the end, get to the nut of it: have we seen the low in the stock market for this year, or not? Even if you are not a technician, below are four charts worth thinking about.


First, let's go over very quickly the numbers you will see on each chart. These numbers are patterned expressions of selling (or, on the upside, buying) exhaustion that were identified by Tom DeMark more than 30 years ago.


This particular pattern we are discussing is an expression called TD-Sequential, and it consists of two components, a setup and a countdown period. Numerically, the setup is complete at 9, the countdown at 13. These patterns help identify potential selling or buying exhaustion points. They are probabilistic and dynamic, because markets themselves are probabilistic and dynamic.


Now, what do these 9s and 13s really mean? Because we are looking for a market low, let's focus on TD-Sequential Buy Setup and TD-Sequential Buy Countdown.


The TD-Sequential Buy Setup consists of 9 consecutive closes that are lower than the close four price bars earlier. The criteria for "perfecting" the sell setup is that the LOW of price bar 8 OR 9 be below the low of BOTH bars 6 AND 7.


Once a Buy Setup is in place, the TD-Sequential Buy Countdown can then begin. The difference between Buy Setup and Buy Countdown is that Buy Setup compares the current bar's close with the close of the bar four bars earlier, while Buy Countdown compares the current bar's close with the LOW two price bars earlier. Also, unlike Buy Setup, Buy Countdown need not occur on CONSECUTIVE bars.


That is the quick and dirty overview of TD-Sequential. It is a bit more nuanced than the broad overview I've given above, but for our purposes in looking at the next four charts, that at least explains that 9s are completed Buy Setups and 13s are completed Buy Countdowns.


On to the charts.


The question is, Have we seen the low for the year? Based on my interpretation of the current weekly chart of the S&P 500, and comparing it to other periods where the market made significant lows (1974, 1987, 2002), I think there is a fairly significant probability that we have not.


Below is the weekly chart of the S&P 500 between 1973-76. As identified on the chart, there was a TD-Sequential Buy Setup and, ultimately, a Buy Signal that registered very near the low of 1974.


S&P 500, Weekly, 1974

1).jpg">CLICK TO ENLARGE

Below is a weekly chart of the S&P 500 between 1985 and 1988. As identified on the chart there was a TD-Sequential Buy Setup at the low. It did not progress to a full countdown, but the initiation of a sell setup (the green 1-2-3 above the bars) was enough to suggest the Buy Setup marked a meaningful possible low.


S&P 500, Weekly, 1987

CLICK TO ENLARGE

Below is the weekly chart of the S&P 500 between 2000 and 2003. Again, as identified on the chart, a Buy Setup registered in July 2002, marking an important low, with the Buy Countdown occurring in January 2003 at a slightly higher level.


S&P 500, Weekly, 2002

CLICK TO ENLARGE

Now, what about the present? Below is the weekly chart of the S&P 500 at its current juncture. Here is my concern. So far, we have not yet recorded a Buy Setup, and are currently on bar 7 of potentially 9. Moreover, in order to "perfect" this Buy Setup (remember, bar 8 OR 9 must have a low that EXCEEDS the low of both bars 6 AND 7), a new low must be made by one of the bars in the next two weeks (next week would potentially be bar 8 and the following potentially bar 9).


S&P 500, Weekly, Present

CLICK TO ENLARGE


What If I'm Wrong?


This view is complicated by numerous buy signals on many of the daily charts of the major indices. But markets, the battles between buyer are seller, are about continually competing timeframes. I believe, looking at these significant market lows, longer-term timeframes tend to have the upper hand at significant market turns. Therefore, my conclusion is we have a high probability of making a new low within the next two weeks.


But I may be wrong. If so, then I do not mind buying stocks at levels higher than today because if I am wrong about the market's present state, then I will at least be entering the market at a point where risk is lower than I believe it is currently.


If you would like to learn more about DeMark price exhaustion techniques, I recommend a new book that was recently published by Jason Perl, appropriately titled, "Demark Indicators."

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