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Five Things You Need to Know: Is This the Bottom?

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Are we there yet?

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


Are we there yet? Are we there yet? That is the chorus, the chant, the mantra percolating up and out from stock traders and investors. It's understandable. After all, the S&P 500 (SPX), (SPY) is down about 40% for the year. We must be getting close, right?


On October 16 I made the case (Five Things You Need to Know: The Case Against the Low) that we had not yet seen the lows for the year. That prediction was based on my interpretation of some DeMark price exhaustion technique indicators as well as the state of credit markets.


So, a few weeks later, where do we stand now? Is the low finally in for the year? Well, I don't know about "for the year," but I do have an opinion about the next few weeks based on what may happen this week.


Warning: This section is somewhat technical, skip down to Conclusion for the conclusion.


Brief Refresher:

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.


Where are we today?

Looking at daily charts of the S&P 500 December futures (SPZ8) and the Nasdaq 100 December futures (NDZ8) through the lens of DeMark price exhaustion techniques, we are nearing a potental turnaround point for the next few weeks. We could see a TD-Sequential Countdown 13 buy signals potentially registering as early as Thursday.



To register 13's thursday, we will need tomorrow's low to be below the low of countdown bar 8 (11/6 = 897 for SP; 11/5 = 1297 for ND) and the close to be below the close two bars earlier, so Thursday's close would need to be below 1223 ND and 893 SP. This is basis the pit session, not the overnight.



Of course, these are only the daily time frame charts. In the piece on October 16 I looked at the longer-term time frame weekly charts. While TD-Sequential 13's typically accompany price exhaustion and result in reactions within the next 12 subsequent periods. On weekly, monthly and quarterly charts the situation remains far more dire.



There is an unperfected 9 Buy Setup on the weekly chart for SPX cash, but not a 13 buy signal. Imperfect Buy Setups typically resolve down the road at new lows.



The monthly chart is only on a count of 6 of a potential 9 Buy Setup that could eventually track us for exceeding the low that is established this month and/or next month after the first of the year in order to perfect.



And the quarterly chart is only on bar 4 of a potential 9, which would register the first quarter of 2010.


My Conclusion: TD-Sequential buy signals registering on the daily charts, perhaps as early as Thursday, would be the first sign we may be at a tradable low. However, the longer-term time frames remain dominant, and the initial downside target of 777 for the S&P 500 (SPX) looks likely, with potentially even lower prices later in 2009.


What about those quarterly charts, anyway?



It is understandable to wonder how on earth quarterly charts could reliably reveal anything about supply and demand, so check out the quarterly INDU chart from 1929 to 1945.


CLICK TO ENLARGE


The 9 Buy and Sell setups (buy setups are printed below the bars, sells above) worked pretty well during the Depression era.

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