Adapting Sequential Sell Signals to Wyckoff’s methods

A long position that I put on a few days ago paid off for me today.  DXPE showed up on my Sequential screen when it crossed into the shaded area shown on the chart.  The area is defined by using a modified version of Demark’s TD Sequential indicator.  Basically the Sequential indicator defines an important level that can correspond to a turning point in a move up or down.  Many top money managers use it to help them scale into, or out of a position without driving the price higher or lower, depending on what side of the trade they are on.  To put it another way, the Sequential indicator is a counter-trend signal that is supposed to signal a turning point in a trend.

DXPE Sequential Sell Count

There is an Achilles heel for the indicator, especially for stocks in a bull market, and that is strongly trending prices will breakthrough sell signal after sell signal as markets rally, leaving bears wondering why the Sequential signal has failed them.  Such a situation seems to exist now and instead of lamenting the failure of the signal, I use it to my advantage.

The strategy is simple, watch for a Sequential signal to fail and wait for the retest of the breakout or breakdown to enter in to a long or short position, respectively.  I have attached the latest profitable example on this post.  The chart is DXPE and it recorded a classic Sequential sell signal on December 12, 2011.  I do not use the exact methods of Demark, especially for stocks and waited for my modified signal to occur on December 20th.  In the typical methodology, I should have initiated a short position and looked for the price to move down to at least 29, using a stop loss of 34.21.  But given the overall market conditions I did not and just let the price move while watching it via my Sequential screens.

DXPE retests breakout

As you can see, a breakout above the Sequential sell stop-loss occurred and then it was just a matter of setting an alert and waiting for the retest, which happened a few days ago. Notice that the retest was on lighter volume, giving me the go-ahead to initiate a long position.  The lower end of the shaded area becomes my new stop-loss point.

This simple setup is nothing revolutionary, it is just using the teachings of Richard Wyckoff and adapting them  to Demark’s Sequential indicator.