Breakout Qualifiers

[The following passage is taken ad verbatim from p.167-168 of New Market Timing Techniques by Tom Demarker (1997, Wiley). It is about some qualifiers to distinguish a true breakout of a trendline from the false ones.]

The qualifiers for an intraday upside breakout above a TD Supply Line are as follows:

1. The close on the trading day before an upside breakout must be a down close. This implies that most traders in the market are expecting the market to move lower nad will initially be skeptical of any upside breakout and, consequently, when it occurs intraday will be reluctant to enter the trade until the close approaches. At that time they likely will concede the breakout is legitmate and reverse their positions. In fact, these traders may initially sell the suspected breakout anticipating a failure, and their mistake and eventual cpitulation becomes apparent into the market's close when price moves generally accelerate in the direction of the breakout.

2. The close on the day before the upside breakout is an up close, and consequently Qualifier 1 is not active. Despite that fact, if the opening price is above the TD Line, then the dynamics of the marketplave have more than likely shifted so dramatically in favor of buyers and the upside since the previous day's close that the breakout is legitimized. However, two additional conditions, not included in my previous book, must also be present to confirm Qualifier 2. First of all, the opening price must not only be above the TD Supply Line but also above the previous day's close since it is possible, if the TD Supply Line is very steep, that price can open above the line but below the previous day's close. Second, price must follow through by at least one or two price ticks above the opening price level since the opening could be a last gasp of demand in a price vaccum caused by specialists or market makers, and this exhaustion would not be present a buying opportunity; rather, it would coincide with a price peak.

3. Even if the close the previous trading day is up and the cureent day's opening pive is below the TD Supply Line or fails to follow through after the open, if the current day's high is able to surpass a measure of the previous day's demand and then exceed the TD Supply Line, this demand should justify an intraday upside breakout, which will be confirmed for a conventional chartist by a closing price above the TD Supply Line. Calculate the previous day's expression of demand or buying by substracting the difference between the previous day's closing price and that same day's true low (the same day's low or the previous trading day's close, whichever is less). Then add that value to the previous trading close to identify the level at which the buying pressure expressed that trading day will be replicated the current trading day. If this value is beneath the TD Supply Line and subsequent to price exceeding this measurement of demand and then exceeding the TD Supply Line, there is sufficient buying to justify intraday entry on the upside breakout. However, if the TD Supply Line breakout upside occurs prior to the measure of demand exceeding the previous day's level, Qualifier 3 is not fulfilled.

4. A potential new Qualifier that I am currently researching for inclusion to the Qualifier set relates the true price range the day before a breakout to the breakout level. Specifically, if that price range is doubled and the breakout level added to the previous trading day's close for an upside breakout (subtracted from the previous trading day's close for a dwonside breakout) exceeds these price levels, then the breakouts are disqualified. Otherwise they are qualified. Note that this is preliminary work, however.