Using DeMark's TD Lines to identify trend line breaks.

As the Dollar strengthened and the Euro weakened over the past weeks and months, I've seen many posts online on forums and blogs questioning the move, trying to find justifications for the strength of the dollar given the weak U.S. economy and several theories thrown out there. The one thing many of these posts had in common is the awaited reversal, when will it happen and how far will it go.  As I look at the weekly chart for the EURUSD, there is a clear trend line break forming for the upside.  Is this the retracement everyone is looking for?  or will the break fade and never take place.   We can use DeMark's techniques to analyze the trend line break.

There are 4 DeMark qualifiers, only one is needed for a DeMark trendline break.  Lets take a quick look at each qualifier to see if the break is good or bad based on DeMark.

Qualifier 1: The price bar prior to an upside breakout must be a down close.

Simply said the current bar is green and we are looking for a break on the upside so there previous bar should be red.  In this case it is not.

Qualifier 2: The current price bar's open must be greater than both the current TD Supply Line and the previous price bar's close and must then trade at least one tick higher.

The open of the current candle is below the TD Supply Line (green line).  Qualifier is not met.

Qualifier 3: The previous price bar's close plus the previous bar's "buying pressure" must be below the current price bar's TD Supply Line price level.

To calculate the buying pressure, you subtract the low of the bar from the close of the bar.  In this case buying pressure is .0713, if we add that to the previous bar's close we get 1.4155 represented by the brown line on the chart.  Since we are above the TD Supply Line (green line) we can say that this qualifier is not met.

Qualifier 4: The current price bar's open must be above both the previous two price bars' closes, and the current price bar's TD Supply Line must be above the previous price bar's high.

The fourth qualifier is met, the current price bar's open is above the previous two closes and the TD Supply Line (green line) is well above the previous bar's high.

Based on the fourth qualifier, the trend line break is good and should be taken.  Entry point would be at the current price levels which is at 1.3715 right now, take profit target is at 1.54 (based on DeMark, I will go through the details on calculating that in a future blog).  As far as an exist strategy the TD Line method has 3 situations in which the trade should be closed:

1) Exit the trade if the bar after the breakout bar opens below the breakout price level.  

If the next bar open is below 1.3465, we should exit the trade.

2) Exit the trade if the bar after the breakout bar opens below the close of the breakout bar and closes below the breakout price level.

If the next bar closes below 1.3465 we should exit the trade.

3) Exit the trade if the bar after the breakout bar fails to exceed the high of the breakout price bar.

Currently the high of the breakout bar is 1.3727 but this might change as the week progresses.  If we do not reach a new high next week we should exit the trade.

For more details on the DeMark technique, do a google search on the Currency Trader magazine article called "Drawing objective trendlines: TD Lines" from September 2006 or pick up a copy of DeMark's books: "The New Science of Technical Analysis" or "DeMark and Day Trading".