An indicator designed to identify market exhaustion using price patterns. It can help to anticipate trend reversals.
- Developed and trade marked by Tom DeMark, this indicator helps identify market exhaustion (based on the premise that price reversals are the result of market exhaustion).
Sequential Analysis involves a three step process of counting the daily bars on a bar chart:
- Buy set up: count nine consecutive daily price closes which are lower than the close four days earlier.
- Sell set up: count nine consecutive daily price closes which are higher than the close four days earlier.
Requisite filter (Intersection):
This step is designed to filter-out false expectations of a reversal when the trend is strong.
- To confirm a buy set up the highs of day 8 or 9 must intersect the lows of three or four days previous.
- To confirm a sell set up the lows of day 8 or 9 must intersect the highs of three or four days previous.
- A buy set up is 13 closes lower than or equal to the close 2 periods earlier (unlikely that these will be consecutive)
- A sell set up is 13 closes higher than or equal to the close 2 periods earlier (unlikely to be consecutive).
Only after the entire three-step process has unfolded, would you enter the market.