TRADING TECHNIQUES

B l o o m b e r g M a r ke t s
August 2001

79

TD Lines take the guesswork out of drawing trend lines. They are also valuable in determining
the validity of breaking TD Supply or Demand lines.

GETTING A BETTER TECHNICAL

FIX ON MARKET TRENDS
By Lindsay Glass

J AS O N S C H N E I D E R

ALL TREND LINES are not equal. Some

are clearly better predictors of market direction than others. The challenge for
chartists is to find these better predictors

and to accurately interpret the signals

they give off.
Trend lines delineate a succession of
significant daily or weekly prices in order
to help technicians spot trading opportunities. The lines can be drawn left to right
either from intraday highs to lower intraday highs to form downtrend lines or
from intraday lows to higher intraday
lows to create uptrend lines. Closing
prices can also be used as the points from
which to construct these lines.
While in theory this seems straightforward, in practice its anything but.
Not everyone chooses the same two
points for trend line construction. This
choice is subjective in terms of both the
importance of each point and the length
of time over which to examine price
action seeking relevant points.

FIGURE 1
1 Type GEG <Go> to list technical analysis studies that can be shown as graph

work sheet examples.

2 Type 5 <Go> from the list to see the DeMark Indicators, including TD Lines.

Even if two trend lines are drawn the

same way, the meaning of subsequent
price action as it relates to the trend lines
is subject to individual interpretation.
For example, some technicians look for
any price action that
breaks the trend line
T i p B ox
to validate a change in
Type TDEF <Go>
a trend or an end of
to change your
a trend. Others require
graph and techa single close beyond
nical analysis
defaults.
the line or even two
consecutive closes beyond the trend line for
validation. Some traders may even look
for the entire daily price bar to be above
a downtrend line or below an uptrend line
for a trend change to be confirmed.
WITHOUT A CONSISTENT approach to the
creation of trend lines, research analysts,
traders and portfolio managers cant get
the most from these predictive tools. To
lessen subjectivity here, market technician
Tom DeMark created a trend line indicatorTD Lineswhich is mechanically
reproducible and able to identify a potential trend line breakout or failure.
On the Bloomberg Professional service, the TD Lines indicator can be easily
created in the Graph Worksheet function:
G. To see an example, type GEG <Go> 5
<Go> for DeMark Indicators and then 3
<Go> for TD Lines (figure 1).
A bar chart of either the most recent
security you requested or your default security will appear, with the TD Lines study
overlaying it. Type 99 <Go> as instructed
at the top of the screen to save this study
template in your own Graph Worksheet
menu. From there it can be accessed and
edited by typing G <Go>. To apply this

B lo o m b e r g M a r k e t s
August 2001

study to any underlying security or marketIntel Corp. for exampletype INTC

US <Equity> G <Go> and then choose the
number of your TD Lines template.
TD Lines are trend lines based on two
recent market points. Such points, known
as TD Points, are either flanked on both
sides by lower highs or surrounded by
higher lows on either side. A TD Point
High is an intraday high with lower true
highs on either side of it. A TD Point Low is
an intraday low with a higher true low preceding it and succeeding it. The true low is
the lower of the bars low or the previous
close. Conversely, a true high is the bars
high or the previous bars close, whichever
is higher. Level one TD Points are used
throughout this article, but higher levels
of TD Points can also be used, though
this requires a greater number of lower
true highs or higher true lows on either
side of these points.
The TD Lines that link the TD Points can
be either TD Supply Lines (downtrend
lines) or TD Demand Lines (uptrend lines).
Figure 2 shows examples of TD Points, TD
Supply Lines and TD Demand Lines. On this
figure, key points of the indicator have been
labeled. Points A and B are TD Point lows
with a TD Demand Line joining them. Points
C and D are TD Point highs with a TD Supply Line linking them.
TRADITIONAL DOWNTREND LINES are
usually constructed by arbitrarily picking
two significant high points and drawing
a line sloping down. Most users identify
that first point by looking at the left side
of the chart and then moving toward the
right-hand side of the chart to locate a
significant lower high. The points are then
joined by a downtrend line.
Taking a somewhat different tack,
DeMark suggests identifying TD Points
by looking from right to left or from
most recent TD Point and then to TD
Points further backor left on the
chart. Once the two most recent TD
Points have been located, TD Lines are
drawn from left to rightjust like conventional trend lines.
TD Lines can be either qualified or
disqualified. Qualified and disqualified

TRADING TECHNIQUES

FIGURE 2
1 Type INTC US <Equity> GEG <Go> 5 <Go> 3 <Go>.
2 Type 99 <Go> to copy the graph to your Graph Worksheet Main Menu.
3 Type G <Go> to list your work sheets.

labeling refers to the validity of any price

breaks of these TD Lines.
A TD Supply Line (downtrend) is constructed by drawing a line between the
most recent TD Point high and the
second-most-recent TD Point high
which is higher than the first TD Point

you chose. TD Supply lines that are

qualified are shown as magenta lines.
Conversely, a TD Demand Line (uptrend) is constructed by joining the most

recent TD Point low with the secondmost-recent TD Point lowwhich is

lower than the first TD Point you identified. Qualified TD Demand lines are
shown as green lines on the charts.
All of the TD Lines shown are qualified.
Point E is an example of Qualifier One (the
previous close is an up close), and the close
at point F is lower than the Demand Line.
Point F also demonstrates Qualifier Two (an
open less than the Demand Line with price
follow-through), and the close at point F is
below the TD Demand Line. Point G shows
Qualifier Three (close less selling pressure
is above the next day's Demand Line level),
and point H confirms the qualifier by closing below the Demand Line after it breaks
below it.
Market prices that cross through qualified TD Lines are expected to continue
trading in the direction of the breakout.
The term disqualified as applied to TD
Lines indicates any price breaks through
a TD Line that will typically fail to close
in the direction of the break during that
price bar (figure 3). These two TD Line
characteristics enable traders to capitalize earlier with a trend when trading with
a qualified TD Line as well as when trad-

J AS O N S C H N E I D E R

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B l o o m b e r g M a r ke t s
August 2001

ing against intraday price moves through

a disqualified TD Line.
TD Lines should be checked to see if any
qualifiers exist before theyre labeled qualified or disqualified. Typically, you check to
see if each qualifier exists in succession. If
any one qualifier exists, then the TD Line is
qualified. Conversely, if none of the qualifiers exist, then the TD Line is disqualified.
The service automatically activates all qualifiers when this study is created within the
G function. It also gives you the option to
turn off any of the conditions.
Three conditions can be used in qualifying a TD Line. The first TD Line qualifier keys off the close on the bar prior to
the current bar. If a TD Demand Line
(uptrend) exists and the previous days
close is an up close, then the breakout is
valid and you can go with the price action intraday with the expectation that
prices will close below the TD Line. See
in figure 2 the price bar at point E, for
the qualifier; see the bar at point F for
the price action.
IF YOU USE conventional trend lines, you

normally wait for a close above or below

a trend line to confirm a break and forsake the earlier price movement that TD
Lines identify. If the previous days close
were an up close and Qualifiers Two and
Three are not valid, then the TD Supply
Line is disqualified and gives you the opportunity to fadeor trade againstthe
trading above the line.

Supply Line application examples of this

trading approach.
The second qualifier comes into play
if theres an opening above a Supply Line
or below a Demand Line. Assuming that
the previous close hadnt qualified the
Supply Line, the current days open qualifies the line if, after the open jumps

WITHOUT A CONSISTENT APPROACH TO THE

CREATION OF TREND LINES, YOU CANT GET
THE MOST FROM THESE PREDICTIVE TOOLS.
The same conditions apply to TD Demand Lines. If theres an up close the day
before a rising TD Demand Lines current
day, then the line is qualified and you can
execute at the break lower rather than
waiting for a confirming close. Had there
been a down close the day before the TD
Demand Lines current day, then the line
is disqualified and the break can be identified as false and can be traded to take
advantage of a move back across the TD
Line. See figure 3, points A and C, for TD

FIGURE 3
1 Type SP1 <Cmdty> GEG <Go> 5 <Go> 3 <Go>.
2 This bar chart demonstrates the application of disqualified TD Lines,

which in this case are disqualified TD Supply Lines. In all casesat all
points A, B and Cnone of the three qualifying conditions were met.
This disqualified the breakout price action above the Supply Line and
suggested a close back below the line, which occurred in all three cases.

above the Supply Line and the previous

close, the price then trades at least one
tick higher. This price action indicates
very strong buying demand and might
be caused by news or events not already
discounted in the price.
Alternatively, for a Demand Line to be
qualified, it requires that the opening price
be below both the rising Demand Line and
the previous days down close and that it
then trade at least one price tick lower.
The requirement of an additional tick
sometime after the open verifies that the
open hasnt exhausted all buying or selling
pressure. Figure 2, point F, is an illustration of this second qualifier and also of the
close below the Demand Line. Note that
this Demand Line was qualified by both
TD Qualifier One (previous close was an
up close) and TD Qualifier Two (open less
than Demand Line and trades lower by at
least one tick).
The third and final qualifier measures
buying and selling pressure and relates
this to the close and the relevant TD Line.
Buying pressure is the difference between
the bars close and its true low. Conversely, selling pressure is the difference
between the bars close and its true high.
In order to qualify a Supply Line, the
previous days buying pressurewhen
added to that same days closemust result in a price level thats below the current days Supply Line level. Should prices
then exceed the Supply Line, the breakout is qualified and prices should continue to trade above the line.

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B lo o m b e r g M a r k e t s
August 2001

Qualification of a rising Demand Line

occurs when the previous days selling pressurethe difference between that days
true high and the closewhen subtracted
from the same days close, indicates a level
thats above the current days Demand Line
level. If prices break below the rising Demand Line, the price action is qualified and

TRADING TECHNIQUES

Lines value from that high. You then take

that value and project it downward from
the current days Demand Line price break
to calculate a likely price target.
The chart of Kellogg Co.s stock price
in figure 4 shows price targets for breaks
of both Demand and Supply as red horizontal lines with their respective price

TD LINES OFTEN PROVIDE DISTINCT

ADVANTAGES OVER CONVENTIONAL
TREND LINES.
can be expected to continue. Point G in figure 2 shows an instance of TD Qualifier
Three appearing, and point H shows the expected price action.
Disqualified TD Lines occur when none
of the three qualifiers are found in the
price action; that is, if you dont have any
qualifiers, whats left are disqualified
lines. These disqualified TD Lines are
shown as dotted blue lines in the G function on the system. Any price movement
breaking these lines can be expected to
turn back through these lines during the
same day or by the next day as shown in
figure 3 at points A and C.
TD Lines have another use besides
taking the guesswork out of drawing
trend lines. In addition to qualifying TD
Line breakouts early, the TD Lines indicator also provides breakout price targets for later price movement. Applied
only to qualified TD Lines, these targets
are derived from the price bars preceding a line break.
In order to determine the price target
for the break above a Supply Line, for example, you determine the vertical distance
from the lowest low below the Supply Line
up to the Supply Line level on that same
day. You then add that distance to the current days breakout level to gauge a price
target level for future price movement.

levels labeled. These price targets created

by market dynamics allow traders to estimate the extent of future price action as
soon as a qualified TD Line break occurs.
Once a qualified TD Line appears, cancellation of this line and breakout can still
take place. And like qualification, there are
three conditions that can cancel a TD Line:
First, if on the day following a TD Line
break the market opens back below a
Supply Line break or above a Demand
Line, the line is canceled. Second, if on
the day following a TD Line break the
market opens in the opposite direction

of the breakout bars close and then

continues to close opposite the direction of the TD Line price break, the line
is canceled. And third, if on the day
following a TD Line break the market
fails to trade above the Supply Line
break bars high or below the Demand
Line break bars low, then the line is canceled. The TD Lines indicator in the G
function automatically considers these
three cancellation conditions and displays
them as red Supply or Demand lines.
The TD Lines indicator is able to mechanically reproduce objective trend lines
for all markets and time frames by connecting the two most current TD Points.
These lines can then be qualified or
disqualified and can warn traders of the
likelihood of any price breakouts continuing. Once a qualified TD Line has been
broken, the indicator highlights a marketderived price target.
Conventional trend lines have their
uses, but because of their unique qualities, TD Lines often provide distinct advantages over the conventional variety.
LINDSAY GLASS is business analyst for technical
analysis and DeMark Indicators specialist at
Bloomberg in New York.
lglass@bloomberg.net

THE PRICE TARGET for a break of a De-

mand Line is calculated in the same

way. You identify the highest high above
a Demand Line and subtract the Demand

FIGURE 4
1 Type K US <Equity> GEG <Go> 5 <Go> 3 <Go>. This chart shows a Supply

Linethe magenta lineending on June 5, 2001, and its price target of

28.78, which was reached on June 21, 2001. The Demand Linethe green
lineending on June 6, 2001, projects a 26.23 target that was attained on
June 8, 2001. The market subsequently rallied.