The monthly chart (attached) has now completed a perfected “sell” setup. We have discussed the possibility of this happening previously. The Support level associated with this setup is at the March 2009 low of 666.79.What does T. DeMark have to say about trading these setups? One of his suggestions is to use TD Supply and Demand Lines for entry providing an oscillator is an overbought position. Please note that this is a different strategy for trading than the one I presented on January 10.
Let’s build a trading system based on some of these ideas. We start once a perfected setup has occurred (like in the present monthly chart). Next we want to see the Demand Line (in the case of a sell setup) broken. In the case of the current monthly chart we have already broken that line (dashed green upsloping line) and so instead we want to see the next price bar open below the Demand Line. Unless we open about 150 points higher on Monday this will happen. However; before you initiate the trade you want the REI (not shown on the chart) to be in a mildly overbought position. It is not. The short trade can not be taken.
If you were to apply these same rules to the weekly chart you would not have been able to short that chart in early January either. But something new is being threatened on the weekly chart and I will look at that tomorrow.
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