To The Moon

The stock market is a dynamic and ever-changing landscape that requires traders to keep up with the latest trends and indicators to stay ahead of the game. One such indicator is the TD Sequential, a popular tool used by traders to identify potential reversal points in the market. Today, I will discuss in detail how I will trade SPY based on the formation of TD9, a crucial pattern in the TD Sequential.

Understanding the TD Setup

The TD Sequential is a technical indicator that uses price and time to identify potential trend reversals in the market. In a bearish trend, the TD Sequential plots the number ‘1’ if a candle closes lower than the close of a candle four periods ago. This rule is applied for all the following candles until the pattern is canceled by a candle closing higher than the candle four periods earlier. The TD Sequential pattern continues until the number ‘9’ is plotted on the bottom of a candle, indicating a potential reversal point. For the perfect buy setup, the lows of the 8th and 9th candle must be lower than the lows of the 6th and 7th candle. Vice versa applies for a bullish trend and perfect sell setup.

 Trading Signals in the Setup Phase

Once a TD Sequential pattern is completed, there is a high probability that the market will reverse in the opposite direction. The number ‘9’ is ideal for entering a trade opposite to the established trend, with the stop-loss above or below the highs/lows of the 9th candle. If the pattern plays out, the pullback will be significantly strong during the first 3-4 candles after the confirmation of number ‘9’.

 TD9 Formation in SPX and SPY

SPX day chart

TD9 formation on SPX

Now let's take a closer look at the current state of the $SPDR S&P 500 ETF Trust(SPY)$ and how the formation of TD9 can impact trading decisions. Interestingly as of today, $S&P 500(.SPX)$ is at TD9 count 7 (see charts above), while SPY is at TD9 count 6 (See charts below). This indicates that the market may be heading for a reversal in latter part of the week, depending on how the pattern plays out.

SPY Day Chart

TD9 formation on SPY

What we should look out for today?

• For TD9 sequence to continue, SPY needs close lower than 398.54 (22 Feb closing price) today.

• While SPX needs to close lower than 3991.05 (22 Feb closing price) today to form count 8.

• For the perfect buy setup, SPX need to go lower than 3943.08 today, i.e. lower than the low on 24 Feb. So today when market close, we will be able to make a guess whether the market can successfully reverse later in the week.

Buying Call Option at 390

Based on the daily chart for SPY, the next level of support should be around 390. So I will be buying call options $SPY%2020230310%20390.0%20CALL$ $SPY 20230310 390.0 CALL$  expiring next week and take profit at different times depending on whether TD9 is able to form:

1. If the TD9 sequence fails to form and SPY closes higher than 398.54 today, I will be taking profits on this trade either today or tomorrow or the day after, depending on how the market moves. Maybe TSLA may lead the market higher tomorrow with its Investor’s Day event and break the TD9 sequence. But this may extend the current downtrend.

2. On the other hand, if TD9 does form this Thursday, I will hold on to my 390 Call Position for a while to let it run for more profits.

 Combining TD Sequential with other TA Tools

To ensure consistency, it is important that any additional signals or indications are in agreement with the findings of the TD Sequential. While the TD Sequential is a highly effective tool for predicting when a price reversal may occur, it is important to note that it cannot definitively predict whether a reversal will occur. Additionally, the TD Sequential is only applicable to Candlesticks or Bar charts. In my own practice, I typically incorporate the Relative Strength Index (RSI) in conjunction with the TD9. Currently the RSI for is around 43, indicating SPY is near to oversold region of 30.