Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

NEW TECHNIQUES

The TD Range
Expansion
Index (TD REI)

from years of research suggest that price comparisons other

than day to day generally produce better indicator performance. This could be due to daily news events and other
short-term factors that tend to influence oscillator behavior,
often creating distortions and therefore invalid conclusions;
one days price movement does not necessarily establish a
price trend. Ideal overbought and oversold conditions are
often overlooked if you restrict the comparisons to daily
closing prices, rather than other price levels such as daily
highs or lows. Consequently, most of my techniques have the
following characteristics:

Here, the author of The New Science of Technical Analysis

and the brand-new New Market Timing Techniques explains
how to use the TD REI and the TD Price Oscillator Qualifier.

1 Ignoring day-to-day closing price comparisons,

relying instead on intraday highs and lows.

by Thomas DeMark
hroughout my 26-year career in
the investment business, I have
studied and tested many widely
followed market timing oscillators. Overall, I have questioned
their construction, ambiguous interpretation and discretionary application. Consequently, I have
developed my own series of indicators, and to simplify their application, I have assigned to them an objective interpretive
process. In The New Science of Technical Analysis I presented the TD Range Expansion Index (TD REI), and now I
have improved upon it, as explained in my latest book, New
Market Timing Techniques. Here, then, is a discussion of
salient TD REI components, as well as the trigger mechanism
referred to as the TD Price Oscillator Qualifier (TDPOQ). The
TDPOQ is critical to the proper application and execution of
the TD REI as well as many other widely followed overbought/oversold oscillators.

TO START
My frustration with most conventional overbought/oversold
oscillators stems from the steps typically used to calculate
them. Most often, the method for calculation requires not just
a comparison of two consecutive daily closing prices, but
also a series of daily indicator values calculated by using
exponential smoothing. Other than the fact that it has become
market convention to perform these mathematical exercises
for most widely followed indicators, there seems to exist no
other reason to make such daily comparisons or complicated
calculations.
I am hard-pressed to demonstrate better results by applying formulas that are exponentially derived as opposed to
being arithmetically derived. In addition, there is little to be
gained by just using closing price comparisons as opposed to
other price relationships. In fact, the results I have produced

2 Comparing the price activity every other trading day

instead of day to day reduces the impact of shortterm market factors that may temporarily influence
price activity.
3 Applying simple arithmetic, as opposed to exponential formulas, to arrive at indicator values.

TD RANGE EXPANSION INDEX

The TD REI, which will be fully detailed shortly, can be
applied to market price activity in several different ways.
Some applications are obvious and similar to those commonly used by many market analysts. Other approaches that
were at one time proprietary and that I am now making
available are applicable not only to my set of market timing
oscillators, but also to other market timing indicators.
However, I must caution you: Although the performance
results that appear in this article may create the impression
that all market turns can be identified by following TD REI
and TDPOQ, this is not the case. No market timing technique
or indicator is infallible. Just about the time you become
convinced that one is, and you are comfortable with its
application and performance results, it will invariably fail.
Traders must realize that no technique, indicator or system is
infallible. Stop-loss disciplines and money management techniques are important determinants of trading success and
should not be dismissed or minimized.
The TD REI construction may initially appear complicated, but it is much simpler to calculate and follow than most
other popular market timing oscillators. The TD REI is a ratio,
and the calculation is as follows:
Compare the current trading days intraday high
with the intraday high two trading days earlier.
If the current trading days high is greater than the
high two trading days earlier, then a positive value is
recorded; otherwise, record a negative value or zero
if equal.
Compare the current trading days intraday low with
the intraday low two trading days earlier.

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Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

If the current trading days low

is greater than the low two trading days earlier, then a positive
value is produced; otherwise,
record a negative value or zero
if equal.
These two differences are
summed whether both are
negative or positive, or one is
negative and the other is positive.
Each days net value is added
over the entire period evaluated, and the summation of this
daily series becomes the value
for the numerator portion.
Next, calculate the absolute
value of the price difference
between the current trading
days high to the high two trading days earlier, and the absolute value of the price difference between the current trading days low to the low two
trading days earlier.

The TD REI value will fluctuate positive or negative and the range of
movement will vary from 100 to
-100. The concept of absolute value
is designed to measure price movement from one price level to another,
and to ignore whether the price movement is in a positive or negative
direction.
Research studies indicate that approximately 76-82% of the time,
markets operate within a trading
range. The identification of overbought/oversold indicator zones is
usually effective within this environment. Of the 18-24% of the time
in which markets trend, typically,
12-16% of the time it is upside and 68% of the time it is downside. The
disparity between these statistics is
likely to be attributable to the fact
that buying is a cumulative decisionmaking process, psychologically re-

Copyright (c) Technical Analysis Inc.

MIKE CRESSY

These daily values are added

together over the designated
period and the summation of
these values becomes the denominator for the TD REI. Then
multiply the ratio by 100.

Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

inforced as prices move higher. However, selling generally

constitutes a one-time decision if a trader does not like a
currently held trading position, then usually he liquidates it
entirely.
Whereas in most trading range markets, oscillators work
well, in a trending market, most oscillators suffer from a
major deficiency, since they tend to move into overbought or
oversold states prematurely. TD REI has been designed to
reduce the likelihood of this occurring. When comparing the
high and low every other trading day, at least one of the
following conditions must exist as well:
A The current trading days high must be greater than or
equal to the low of five or six days ago and the current
trading days low must be less than or equal to the high
of five or six trading days ago or
B The high of two trading days ago must be greater than
or equal to the close of seven or eight trading days ago
and the low of two trading days ago must be less than or
equal to the close of seven or eight trading days ago.
For example, if the current days high was greater than the
low of five days ago and the current days low was greater
than the high of five days ago, then the market is clearly in a
strong trend. Condition A would not be met. Then, if the high
and low of two days ago were both higher than the close of
seven days ago, then condition B would not be met. Failure
of both of these conditions indicate strength.
These qualifiers serve to delay or postpone the oscillator from
prematurely recording overbought or oversold readings in trending market environments, thereby reducing the likelihood of
selling prematurely into price blowoffs to the upside, or buying
prematurely into price blowouts to the downside. The price
action must demonstrate that the trend is decelerating before a
trader may entertain thoughts of executing a trade.
When both these conditions are absent on a particular
trading day, the standard TD REI version assigns a value of
zero to that days oscillator value, whereas the alternate TD
REI version assigns a value of zero to both that trading days
oscillator as well as the previous trading days value. For
purposes of illustration, this entire discussion is devoted to
the standard TD REI, since all oscillator readings reflect an
adjustment caused by allocating zero to only the current
trading day if the required price intersection fails to be
present.
Finally, the daily values are summed and averaged over a
fivetrading day period and the TD REI is plotted beneath the
price action of the underlying security to facilitate price and
oscillator comparisons (see sidebar, TD REI).
Trading experience indicates the market is oversold when
TD REI declines below -43 and is overbought when TD REI
advances above 43. My research suggests that most markets
present buying opportunities when TD REI is oversold and
selling opportunities when it is overbought. In some instances, however, markets are justifiably oversold and in-

stead of buying, a trader would be prudent to either withdraw

from the market or sell short into the decline. Conversely,
there are times when markets are justifiably overbought, and
the prudent action would be to either forgo a trade or go long
with the trend.
The difficulty is to distinguish between the various levels or
degrees of overbought and oversold. To facilitate this distinction, I introduced the concept of TD Duration Analysis.

In most trading range markets,

oscillators work well. But in a
trending market, most oscillators
suffer from a major deficiency, since
they tend to move into overbought or
oversold states prematurely. TD REI
has been designed to reduce the
likelihood of this occurring.
Most traditional market analysts apply the concept of
divergence analysis to identify possible market reversal points.
Price activity at potential price tops and bottoms is related to
oscillator values at comparable points in time for confirmation. TD Duration Analysis ignores this comparison and
instead concentrates solely on the amount of time an oscillator remains in the overbought or the oversold zone. Divergence analysis can be described as a reflection of the situation
produced by extreme and subsequent mild overbought or
oversold readings; divergence analysis is the symptom of a
condition and duration analysis is the cause.

TD PRICE OSCILLATOR QUALIFIER

The prescription for fine-tuning low-risk buy or sell entry
levels once a mild oversold or overbought TD REI reading is
recorded is the TD Price Oscillator Qualifier (TDPOQ). To
identify whether a market is likely to advance or decline, the
following prerequisites must be fulfilled:
For a low-risk buy entry, TD REI currently, or most
recently, must have been in the oversold zone and not
the overbought area.
In addition, TD Duration Analysis requires that the
amount of time in the oversold zone be less than six
trading days. Otherwise, any indication of an advance
must be deferred until TD REI moves into the neutral
area and retreats once again into the oversold zone and
records a modest oversold reading, thus remaining in
the oversold area for less than six trading days.
Once that condition is met, the first trading day in
which the market closes greater than the prior trading
days close is identified, and the intraday price high
recorded that trading day serves as a low-risk entry
reference level.

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Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

TDPOQ, one variation of TD Trap from the TD series

of breakout patterns, requires both the open of the
next trading day be less than or equal to the previous
uptrading days high and that days high be greater
than the upclose days high (Figure 1).
Although there are exceptions, these price patterns
indicate market strength expressed by the upclose as well
as a degree of skepticism the following trading day, since
the open is less than the upclose days high. On the other
hand, if the open of the trading day after the upclose day
is greater than both the upclose days high and the prior
days high, the short-term urgency to buy as expressed by
the aggressive buying at the opening suggests the possibility of a short-term price high not a buying opportunity.
For a low-risk sell entry, the conditions are reversed:
TD REI currently, or most recently, must have been
in the overbought zone and not the oversold area.

C
B

FIGURE 1: TDPOQ BREAKOUT PATTERN. TDPOQ requires both the open of the
next trading day (A) be less than or equal to the previous uptrading days high (B)
and that days high be greater than the upclose days high (C).

In addition, TD Duration Analysis requires that the

amount of time in overbought zone be less than six
trading days. Otherwise, any indication of a decline
must be deferred until TD REI moves into the neutral
area and advances once again into the overbought
zone and records a modest overbought reading, thus
remaining in overbought for less than six trading
days.

A
B C

Once that condition is met, the first trading day in

which the market closes less than the prior trading
days close is identified and serves as a low-risk
entry reference level.
TDPOQ requires both the open of the next trading day
be both greater than or equal to the downclose days
low and that same trading days low be less than the
downclose days low (Figure 2).
Once again was the opening price of the trading day following the downclose day less than either the downclose days
low or the prior days low. The short-term urgency to sell as
expressed by the aggressive selling at the opening implies the
possibility of a short-term low again, not a selling opportunity.

EXAMPLES
The US Treasury bond chart seen in Figure 3 demonstrates
the application and the interpretation of TD REI and TDPOQ.
Alternating periods of overbought and oversold oscillator
readings are displayed and identified on the chart by solid
horizontal lines positioned at levels -43 and 43. The instances
in which the oscillator remains overbought or oversold for
more than six trading days can be classified as extreme are
identified on the chart with a TD Duration count of 6. Those
times in which the oscillator remains overbought or oversold

FIGURE 2: BREAKOUT PATTERN. TDPOQ requires both the open of the next
trading day (A) be both greater than or equal to the downclose days low (B) and
that same trading days low (C) be less than the downclose days low.

for less than six trading days records a mild reading.

Traders should avoid anticipating trend changes when
severe or extreme readings are recorded. By introducing a
count variable that appears on the chart, traders are made
aware of this condition; nevertheless, disqualified TDPOQ
trades appear to work, whether an extreme or mild overbought or oversold reading exists.
Although a trader can often take advantage of overbought
or oversold opportunities that occur over a shorter time
interval, there is a specified series of events that must unfold
sequentially to define and refine low-risk entry levels. The
asterisks on the chart coincide with those instances in which
the following prerequisites are fulfilled:
1 Five or fewer trading days in the oversold or overbought zone have occurred.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

*
-

CQG FOR WINDOWS

FIGURE 3: T-BONDS. The US Treasury bond chart seen here demonstrates the
application and the interpretation of TD REI and TDPOQ. Alternating periods of
overbought and oversold oscillator readings are displayed and identified on the
chart by solid horizontal lines positioned at levels -43 and 43. The instances in which
the oscillator remains overbought or oversold for more than six trading days can be
classified as extreme are identified on the chart with a TD Duration count of 6. Those
times in which the oscillator remains overbought or oversold for less than six trading
days records a mild reading.

FIGURE 4: IBM. Figure 4 illustrates a similar series of TD REI low-risk buy and sell
indications. Asterisks and hyphens display more TD REI opportunities that either
fulfill TDPOQ (*) or fail to fulfill TDPOQ (-).

2 TD REI has currently, or most recently, recorded

either: a mild oversold TD REI reading (below -43)
and subsequently an upclose for an upside move; or
conversely, both a mild overbought TD REI reading
(above 43) and subsequently, a downclose for a
downside move.

same day exceeded the reference price level low. presenting

a low-risk selling opportunity.
A few trading days later, TD REI moved into an oversold
state and the first subsequent upclose occurred shortly afterward. However, the opening price of the next trading day
exceeded the previous trading days intraday high (reference
price as well as the prior days high), thereby failing to fulfill
TDPOQ and disqualifying a low-risk entry at that time. In fact,
a short-term overbought condition appeared shortly after the
opening, since the open was above the reference days high
and price was under pressure all day. Additional asterisks and
hyphens display more TD REI opportunities that either fulfill
TDPOQ (*) or fail to fulfill TDPOQ (-). If TD REI is either
oversold or overbought for more than five trading days, no
activity is presented; however, the failures (-) could have
been displayed.
Figure 4 is the daily chart of IBM and illustrates a similar
series of TD REI low-risk buy and sell indications. In addition, various potential TD REI low-risk opportunities failed to
fulfill TDPOQ by not opening within the previous trading
days price range and exceeding the high for an upside move
or the low for a downside move. The same series of codes
asterisks and hyphens serve to define the various opportunities.

3 A TD Trap breakout is either recorded by opening

within the previous trading days range (the upclose
day) and exceeding that trading days high upside for
an upside move or for a downside move, a TD Trap
breakout is recorded by opening within the previous
trading days range (the downclose day) and typically exceeding that trading days low downside.
Condition 1 conforms to TD Duration requirements and
conditions 2 and 3 fulfill the specifications of TDPOQ. Those
instances in which TD Duration of five or fewer trading days
are fulfilled, but the opening price occurs above the reference
days intraday high and the prior days high for an upside
move or below the reference days intraday low and the prior
days low for a downside move are marked on the accompanying charts with a hyphenated designation (-).
Trading that day should fail to follow through in the
direction of the opening breakout, since the short-term price
move is too aggressive. Exceptions to the latter proposition
do exist but will not be discussed within the boundaries of
this article.
As you can see in Figure 3, TD REI was mildly overbought
in December 1996. After making the price high, the following trading days closing price was less than the prior trading
days close. The next trading days opening price was above
the downclose days low (reference price) and the low that

CONCLUSION
Other qualifiers can be introduced to perfect this process,
such as expanding or contracting the oversold and overbought oscillator band, allowing more than one opportunity
(additional up- or downcloses) to reset entry possibilities,
applying the alternate TD REI calculation when intersection
fails to appear, and making three- or four-day TD REI comparisons rather than two-day comparisons.
As you can readily observe by reviewing these charts, TD

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Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

THE TD REI (THE TD RANGE EXPANSION INDEX)

The TD Range Expansion Index (TD REI) is an oscillator
that uses unique steps in the calculation. The basis of the
oscillator is a comparison of every other trading days
intraday highs and lows to remove any one days random
impact. In addition, there is an additional set of comparisons
to reduce the likelihood of the oscillator reaching an overbought or oversold state prematurely when the market is
trending. There are seven steps to calculating the TD REI,
which are detailed below for an Excel spreadsheet (Figure
1). The TD REI calculations are shown as applied to daily
data for IBM beginning with January 2, 1997.
The first five columns are date, open, high, low and close.
The first set of instructions will begin on row 11, due to the
lookback periods employed in the calculation. The first
step, column F, calculates the difference between todays
high and the high two days ago. Enter into cell F11 the
following formula and copy down:
=C11-C9
Column G calculates the difference between todays low
and the low two days ago. Enter into cell G11 the following
formula and copy down:
=D11-D9
Next, the test for price overlap or intersection is performed. This test checks for the current bars relationship to
the trading bars five or six trading days ago. The current
days high must be greater than or equal to the low five or
six trading days earlier and the current days low must be
less than or equal to the high five or six trading days ago. A
true statement will be returned if these criteria are met. In

cell H11, enter the following formula and copy down:

=AND(OR(C11>D6,C11=D6,C11>D5,C11=D5),
(OR(D11<C6,D11=C6,D11<C5,D11=C5)))
The second test compares the trading bar two days ago to
the trading bars seven or eight trading days ago. The high
two trading days ago must be greater than or equal to the
close seven or eight trading days ago and the low two
trading days ago must be less than or equal to the close
seven or eight trading days ago. A true statement will be
returned if these criteria are met. In cell I11, enter the
following formula and copy down:
=AND(OR(C9>E4,C9=E4,C9>E3,C9=E3),
(OR(D9<E4,D9=E4,D9<E3,D9=E3)))
If either of the above qualifications are true, the difference between the current days high and the high two
trading days ago is added to the difference between the low
today and the low two trading days ago. If both of the
statements are false, indicating that the market is not overlapping the trading bars and is trending, then that requires
the recording of a zero. This step is calculated in column J.
This column is also the one days value for the numerator
portion of the formula. In cell J11, enter the following
formula and copy down:
=IF(OR(H11=TRUE,I11=TRUE),(F11+G11),0)
The one days value for the denominator is the absolute
value of the difference between todays high and the high
two trading days ago and the absolute value of difference
between the low today and the low two
trading days ago. Enter into cell K11 the
following formula and copy down:
=ABS(F11)+ABS(G11)
Finally, the five-day TD REI is the
ratio of the sum of the last five days of
column J divided by the sum of the last
five days of columns J and K. This ratio
is then multiplied by 100 for scaling
purposes. Enter the following formula
into cell L11 and copy down:
=100*(SUM(J7:J11)/SUM(K7:K11))
You can also choose other lookback
periods for each of the calculations.

SIDEBAR FIGURE 1: IBM AND TD REI. After the differences are calculated in columns F and G, columns
H and I check for overlapping bars.

Copyright (c) Technical Analysis Inc.

Thom Hartle, Editor

Stocks & Commodities V15:8 (353-359): The TD Range Expansion Index (TD REI): by Thomas DeMark

REI and TDPOQ do not speak often, but when they do, it pays
to listen. Not only does TD REI introduce numerous potential trading opportunities, but many times, the rigorous
requirements of TDPOQ will serve to prevent premature
entry into a market as well as maintain a traders commitment to a prevailing market trend. The highlight of applying
this disciplined approach is its ability to eliminate or at least
reduce the traders tendency to be subjective or discretionary when applying conventional market timing oscillators
to market price behavior.

Tom DeMark is author of The New Science of Technical

Analysis, as well as New Market Timing Techniques. TD
Range Expansion Index (TD REI), TDPOQ, TD Duration
Analysis, and TD Trap are registered trademarks.

REFERENCES
DeMark, Thomas R. [1997]. New Market Timing Techniques, John Wiley & Sons.
_____ [1994]. The New Science of Technical Analysis, John
Wiley & Sons.
See Traders Glossary for definition

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