Absolute Price Projections, By Tom Demark & Rocke Demark Options

[TTHQ Staff]

<table width="100%" border="1" cellspacing="0" cellpadding="6" bordercolor="#FFFFFF"
height="1069">
<tr>
<td bordercolor="#FFFFFF"><p align="left"><font face="Arial, Helvetica, sans-serif"
size="2"><i>This is from the July 2004 issue of </i>Active Trader<i> magazine. </i></font>
</p>
<p><font color="black" size="5" face="Arial, Helvetica, sans-serif"><b><img
src="http://www.activetradermag.com/images/july04/demarkart0704.gif" width="150"
height="162" align="right">Absolute price projections<br>
</b></font><font color="#000066" face="Arial, Helvetica, sans-serif" size="3">Applying
objective analytical tools to historical price examples results in a sobering forecast for
the stock market.</font></p>
<p><font color="black" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>By TOM
DEMARK AND ROCKE DEMARK</b></font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="#000000">Virtually everyone
has an opinion (or two) about the direction of the stock market. Most of the time,
however, opinions are more a function of a person’s emotions — often influenced
by the latest proclamations from assorted Wall Street pundits — than rational,
deliberate analysis.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">What such projections
and opinions usually lack is a mathematically based methodology designed to forecast price
behavior. The market-timing approach that will be outlined here, called TD Absolute
Retracement, is an objective, mechanical technique that avoids the subjectivity and
ambiguity of conventional technical analysis. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><a name="sidebar1back"></a>TD
Absolute Retracement is the product of extensive research and testing that shows once
important, mathematically defined support and resistance levels are first qualified (see
the “<a href="#sidebar1">Qualifying breakouts</a>”) and then exceeded, the
market will gravitate toward the next critical support or resistance level. This approach
results in a single outlook and outcome, while technical analysis often produces myriad
market perspectives and trading possibilities. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">A review of various
historical market moves and behavior patterns will introduce the basic tenets of TD
Absolute Retracement, which is based on the Fibonacci number series, but differs in the
way it applies ratios of these numbers in the markets. This exercise will also allow you
to use this indicator in your own analysis.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Later, transposing
this historical analysis on the current market will provide potential downside price
targets for the S&amp;P 500 index.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><b>A twist on
Fibonacci retracements</b></font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">The Fibonacci series
is a mathematical number progression with several unique properties. The .618 “Golden
Mean” ratio, which is pervasive throughout nature and has been used in a variety of
ways for market forecasting, is a derivative of the Fibonacci series. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">The sequence begins
with the whole numbers 1 and 2 and then progresses in such a way that the next number in
the series is always the sum of the two most recent numbers — e.g., 1, 2, 3, 5, 8,
13, 21, 34, 55, 89, 144, 233 and so on. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">As the series
progresses, the ratio of a number in the series to the number immediately after it comes
increasingly closer to .618, or 61.8 percent. The Fibonacci series is the only number
sequence that possesses such properties. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Subtracting this ratio
from 100 percent results in another important ratio — 38.2 percent, or .382. Finally,
the average of the two key ratios is 50 percent, or .50. These three ratios are critical
in projecting downside support levels or upside resistance levels when an index or market
has rallied or declined.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><b>Absolute
retracement levels</b></font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">While these ratios
have become increasingly popular in recent years, traders tend to use them in an <i>ad hoc</i>
manner. Typically, traders will measure the size of a price move (say, 20 points from low
to high), multiply that distance by one or more Fibonacci ratio, and subtract the result
from the price high to determine likely retracement (support) levels. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">For example, for a
market that rallied from 40 to 60, the 38.2-percent retracement level would be calculated
by multiplying the price move (20 points) times the ratio (.382) and subtracting the
result (7.64) from the high (60 - 7.64 = 52.36). </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><a name="sidebar2back"></a>However,
the size of the price move depends on the prior low a trader selects, which is a
subjective decision. For example, if a market rallied from 10 to 40, paused, declined to
30 and then rallied again to 60, one trader might reference the most recent low of 30 and
measure the move from 30 to 60 (30 points), while another might select the earlier low of
10 and decide the move was 50 points (see “<a href="#sidebar2">Alternate approaches</a>”).</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">By contrast, TD
Absolute Retracement applies “downside ratios” of 61.8 percent, 50 percent and
38.2 percent directly to price at significant highs, and applies “upside” ratios
of 138.2 percent, 150 percent and 161.8 percent to project prices directly from major
price lows. At market highs, the closing price of the high bar is multiplied by the
downside ratios. At market lows, the low of the low bar is multiplied by the upside
ratios. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">For example,
multiplying a high close of 60 by the 61.8 percent downside ratio would result in a
support target of 37.08. This “absolute” approach removes the subjectivity
normally associated with selecting price moves and applying Fibonacci ratios. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">The following examples
illustrate how these ratios have coincided with critical downside and upside price targets
in major stock market indices. </font></p>
<p><b><font size="2" face="Arial, Helvetica, sans-serif" color="black">Historical market
scenarios</font></b></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">On July 16, 1987, the
London FTSE 100 index reached its all-time high and closed at 2,443.40 (see Figure 1,
below). Multiplying this price by the downside ratio of 61.8 percent produced a price
objective of 1,510.02. The subsequent Nov. 10, 1987, panic low was 1,510.02. </font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-1.gif" width="380"
height="281"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">On Aug. 25, 1987, the
Dow Jones Industrial Average (DJIA) made an all-time high close of 2,722.40 (see Figure 2,
below). Multiplying this value by 61.8 percent projected a downside target of 1,682.44.
When the market bottomed on Oct. 20, the low was 1,616.21.</font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-2.gif" width="380"
height="281"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">The December 1989 high
in the Japanese Nikkei index was 39,820.00 (see Figure 3, below). In October 1990 the
index bounced off the second downside (50-percent) retracement level of 19,910. In July
and August 1992 the Nikkei held at the third and final downside level of 38.2 percent at
15,211. The index also held at this level in June and July 1995 and again for a few months
into 1998 before succumbing to the weight of the market and dropping lower in 2001. </font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-3.gif" width="365"
height="294"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Figure 4 (below) is an
example of a market adhering to an upside absolute retracement level. (Again, the upside
ratios are 138.2 percent, 150 percent, and 161.8 percent.) Calculated from the October
1998 low of 12,787.90, the third absolute retracement upside objective of 161.8 percent
was 20,691, which the Nikkei only slightly exceeded in March 2000. </font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-4.gif" width="370"
height="285"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">When a market meets
and exceeds the initial retracement level (61.8 on the downside and 138.2 on the upside),
it is possible to “re-initialize,” or recalculate retracement levels in the
other direction. For example, because the Nikkei was able to rally to (and past) the
absolute retracement minimum threshold of 138.2 percent off its 1998 low, a downside
projection could be recalculated from the new high (20.833), resulting in a 38.2-percent
downside projection of 7,958. The market eventually fell to and rallied off that low in
2003.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><b>Recent market
action</b></font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="#000000">Let’s evaluate
some of the more recent tops and bottoms in different stock indices. The S&amp;P 500 index
(SPX) made its all-time high on March 24, 2000 (see Figure 5, below), closing at 1,527.46.
Multiplying the close by the 61.8 percent downside ratio created a downside objective of
943.97. The Sept. 21, 2001, low of 944.75 was less than a point away from this target.</font>
</p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-5.gif" width="380"
height="304"> </p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="#000000">The FTSE 100 had
made its all-time high on Dec. 30, 1999. Multiplying the close of 6,930.20 on this day by
the 61.8 percent ratio set a downside target of 4,282.86, which was fulfilled on Sept. 21,
2001 — the same day the S&amp;P reached its objective. Then on Jan. 29, 2003, and
also March 11, 12 and 13, the index declined to the 50-percent level of 3,465.10 (see
Figure 6, below). </font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-6.gif" width="380"
height="371"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">During the same
period, the DJIA established its all-time high on Jan. 14, 2000. Multiplying the close
that day (11,723.00) by 61.8 percent produced a downside price projection of 7,244.81,
which was reached on one day only, Oct. 10, 2002 (see Figure 7, below).</font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-7.gif" width="380"
height="372"> </p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><b>Looking ahead: What
is TD Absolute Retracement projecting now?</b></font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Applying the key
retracement ratios to the markets’ current significant highs and lows results in some
interesting projections for the S&amp;P 500. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Multiplying the first
two TD Absolute Retracement upside ratios — 138.2 percent and 150 percent — by
the Oct. 10, 2002, S&amp;P 500 low (768.67), you get 1,062.30 and 1,153.01 as upside price
projections (see Figure 8, below). Both these levels repelled price for a period of time,
and the second, higher level served as resistance in early 2004. </font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-8.gif" width="365"
height="299"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Comparing the current
market to the 1929-30 DJIA stock market crash reveals the S&amp;P 500 rally from October
2002 is closely mimicking the 1929-30 rally. The 1929 market high came on Sept. 3 at 386 (<a
href="demark0704-9.htm">see Figure 9</a>). The first two (61.8 and 50 percent) TD absolute
retracement downside projections from that high were 238.55 and 193.00, respectively. By
Nov. 13, 1929, both these downside projections had been fulfilled with the low at 198.60. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Projecting higher from
that low day, the first two (138.2 and 150 percent) upside ratio objectives were 274.47
and 297.90. By April 16, 1930, the DJIA had topped above 297.20. From that price, it was
all history — the DJIA bottomed below 40 in July 1932. The DJIA’s two
successively higher highs in February and April 1930 were equivalent to the S&amp;P
500’s recent successive upside highs of 1,062.40 and 1,163.23. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">If the S&amp;P cash
index did, in fact, record its high on March 5, 2004, at 1,163.23, expect the lowest
downside ratio objective of 583.49 — calculated by multiplying the March 2000 high
close (1,527.46) by 38.2 percent — to be fulfilled (see Figure 10, below). Also,
because of the recent 150.02-percent rally from the October 2002 low of 768.67 to
1,153.01, it is acceptable to recalculate another downside projection from the March 2004
high, which confirms the March 2000 projections.</font></p>
<p><img src="http://www.activetradermag.com/images/july04/demark0704-10.gif" width="310"
height="308"></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black">Off the recent March
5, 2004, high close of 1,156.86, the 61.8 percent downside projection is now 714.94, while
the 50-percent ratio projection (578.43) is very near the 38.2-percent ratio projection
(583.49) made in March 2000. </font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="#000000">Although there may
be no comfort in knowing the S&amp;P currently possesses risk of 50 percent from the
recent high, there is mathematical comfort knowing that two important highs project the
same downside support level.</font></p>
<p><font size="2" face="Arial, Helvetica, sans-serif" color="black"><i><b>TD Absolute
Retracement, TD Relative Retracement and TD Arc are licensed trademarks of Tom DeMark.</b></i></font></p>
<p>&nbsp;</td>
</tr>
</table>

[thoughtpwr]

you just gave me a headache trying to read this

[dasein]

There doesnt seem to be a way to post HTML, so here is the text version of traders article. you could also save this page as text - xxx.txt, remane it xxxx.htm, then you could view it with the charts as intended.

This is from the July 2004 issue of Active Trader magazine.

Absolute price projections

Applying objective analytical tools to historical price examples results
in a sobering forecast for the stock market.
By TOM DEMARK AND ROCKE DEMARK

Virtually everyone has an opinion (or two) about the direction of the
stock market. Most of the time, however, opinions are more a function of a
person’s emotions — often influenced by the latest proclamations from
assorted Wall Street pundits — than rational, deliberate analysis.
What such projections and opinions usually lack is a mathematically based
methodology designed to forecast price behavior. The market-timing
approach that will be outlined here, called TD Absolute Retracement, is an
objective, mechanical technique that avoids the subjectivity and ambiguity
of conventional technical analysis.
TD Absolute Retracement is the product of extensive research and testing
that shows once important, mathematically defined support and resistance
levels are first qualified (see the “Qualifying breakouts”) and then
exceeded, the market will gravitate toward the next critical support or
resistance level. This approach results in a single outlook and outcome,
while technical analysis often produces myriad market perspectives and
trading possibilities.
A review of various historical market moves and behavior patterns will
introduce the basic tenets of TD Absolute Retracement, which is based on
the Fibonacci number series, but differs in the way it applies ratios of
these numbers in the markets. This exercise will also allow you to use
this indicator in your own analysis.
Later, transposing this historical analysis on the current market will
provide potential downside price targets for the S&P 500 index.
A twist on Fibonacci retracements
The Fibonacci series is a mathematical number progression with several
unique properties. The .618 “Golden Mean” ratio, which is pervasive
throughout nature and has been used in a variety of ways for market
forecasting, is a derivative of the Fibonacci series.
The sequence begins with the whole numbers 1 and 2 and then progresses in
such a way that the next number in the series is always the sum of the two
most recent numbers — e.g., 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233
and so on.
As the series progresses, the ratio of a number in the series to the
number immediately after it comes increasingly closer to .618, or 61.8
percent. The Fibonacci series is the only number sequence that possesses
such properties.
Subtracting this ratio from 100 percent results in another important ratio
— 38.2 percent, or .382. Finally, the average of the two key ratios is 50
percent, or .50. These three ratios are critical in projecting downside
support levels or upside resistance levels when an index or market has
rallied or declined.
Absolute retracement levels
While these ratios have become increasingly popular in recent years,
traders tend to use them in an ad hoc manner. Typically, traders will
measure the size of a price move (say, 20 points from low to high),
multiply that distance by one or more Fibonacci ratio, and subtract the
result from the price high to determine likely retracement (support)
levels.
For example, for a market that rallied from 40 to 60, the 38.2-percent
retracement level would be calculated by multiplying the price move (20
points) times the ratio (.382) and subtracting the result (7.64) from the
high (60 - 7.64 = 52.36).
However, the size of the price move depends on the prior low a trader
selects, which is a subjective decision. For example, if a market rallied
from 10 to 40, paused, declined to 30 and then rallied again to 60, one
trader might reference the most recent low of 30 and measure the move from
30 to 60 (30 points), while another might select the earlier low of 10 and
decide the move was 50 points (see “Alternate approaches”).
By contrast, TD Absolute Retracement applies “downside ratios” of 61.8
percent, 50 percent and 38.2 percent directly to price at significant
highs, and applies “upside” ratios of 138.2 percent, 150 percent and 161.8
percent to project prices directly from major price lows. At market highs,
the closing price of the high bar is multiplied by the downside ratios. At
market lows, the low of the low bar is multiplied by the upside ratios.
For example, multiplying a high close of 60 by the 61.8 percent downside
ratio would result in a support target of 37.08. This “absolute” approach
removes the subjectivity normally associated with selecting price moves
and applying Fibonacci ratios.
The following examples illustrate how these ratios have coincided with
critical downside and upside price targets in major stock market indices.
Historical market scenarios
On July 16, 1987, the London FTSE 100 index reached its all-time high and
closed at 2,443.40 (see Figure 1, below). Multiplying this price by the
downside ratio of 61.8 percent produced a price objective of 1,510.02. The
subsequent Nov. 10, 1987, panic low was 1,510.02.

On Aug. 25, 1987, the Dow Jones Industrial Average (DJIA) made an all-time
high close of 2,722.40 (see Figure 2, below). Multiplying this value by
61.8 percent projected a downside target of 1,682.44. When the market
bottomed on Oct. 20, the low was 1,616.21.

The December 1989 high in the Japanese Nikkei index was 39,820.00 (see
Figure 3, below). In October 1990 the index bounced off the second
downside (50-percent) retracement level of 19,910. In July and August 1992
the Nikkei held at the third and final downside level of 38.2 percent at
15,211. The index also held at this level in June and July 1995 and again
for a few months into 1998 before succumbing to the weight of the market
and dropping lower in 2001.

Figure 4 (below) is an example of a market adhering to an upside absolute
retracement level. (Again, the upside ratios are 138.2 percent, 150
percent, and 161.8 percent.) Calculated from the October 1998 low of
12,787.90, the third absolute retracement upside objective of 161.8
percent was 20,691, which the Nikkei only slightly exceeded in March 2000.


When a market meets and exceeds the initial retracement level (61.8 on the
downside and 138.2 on the upside), it is possible to “re-initialize,” or
recalculate retracement levels in the other direction. For example,
because the Nikkei was able to rally to (and past) the absolute
retracement minimum threshold of 138.2 percent off its 1998 low, a
downside projection could be recalculated from the new high (20.833),
resulting in a 38.2-percent downside projection of 7,958. The market
eventually fell to and rallied off that low in 2003.
Recent market action
Let’s evaluate some of the more recent tops and bottoms in different stock
indices. The S&P 500 index (SPX) made its all-time high on March 24, 2000
(see Figure 5, below), closing at 1,527.46. Multiplying the close by the
61.8 percent downside ratio created a downside objective of 943.97. The
Sept. 21, 2001, low of 944.75 was less than a point away from this target.


The FTSE 100 had made its all-time high on Dec. 30, 1999. Multiplying the
close of 6,930.20 on this day by the 61.8 percent ratio set a downside
target of 4,282.86, which was fulfilled on Sept. 21, 2001 — the same day
the S&P reached its objective. Then on Jan. 29, 2003, and also March 11,
12 and 13, the index declined to the 50-percent level of 3,465.10 (see
Figure 6, below).

During the same period, the DJIA established its all-time high on Jan. 14,
2000. Multiplying the close that day (11,723.00) by 61.8 percent produced
a downside price projection of 7,244.81, which was reached on one day
only, Oct. 10, 2002 (see Figure 7, below).

Looking ahead: What is TD Absolute Retracement projecting now?
Applying the key retracement ratios to the markets’ current significant
highs and lows results in some interesting projections for the S&P 500.
Multiplying the first two TD Absolute Retracement upside ratios — 138.2
percent and 150 percent — by the Oct. 10, 2002, S&P 500 low (768.67), you
get 1,062.30 and 1,153.01 as upside price projections (see Figure 8,
below). Both these levels repelled price for a period of time, and the
second, higher level served as resistance in early 2004.

Comparing the current market to the 1929-30 DJIA stock market crash
reveals the S&P 500 rally from October 2002 is closely mimicking the
1929-30 rally. The 1929 market high came on Sept. 3 at 386 (see Figure 9).
The first two (61.8 and 50 percent) TD absolute retracement downside
projections from that high were 238.55 and 193.00, respectively. By Nov.
13, 1929, both these downside projections had been fulfilled with the low
at 198.60.
Projecting higher from that low day, the first two (138.2 and 150 percent)
upside ratio objectives were 274.47 and 297.90. By April 16, 1930, the
DJIA had topped above 297.20. From that price, it was all history — the
DJIA bottomed below 40 in July 1932. The DJIA’s two successively higher
highs in February and April 1930 were equivalent to the S&P 500’s recent
successive upside highs of 1,062.40 and 1,163.23.
If the S&P cash index did, in fact, record its high on March 5, 2004, at
1,163.23, expect the lowest downside ratio objective of 583.49 —
calculated by multiplying the March 2000 high close (1,527.46) by 38.2
percent — to be fulfilled (see Figure 10, below). Also, because of the
recent 150.02-percent rally from the October 2002 low of 768.67 to
1,153.01, it is acceptable to recalculate another downside projection from
the March 2004 high, which confirms the March 2000 projections.

Off the recent March 5, 2004, high close of 1,156.86, the 61.8 percent
downside projection is now 714.94, while the 50-percent ratio projection
(578.43) is very near the 38.2-percent ratio projection (583.49) made in
March 2000.
Although there may be no comfort in knowing the S&P currently possesses
risk of 50 percent from the recent high, there is mathematical comfort
knowing that two important highs project the same downside support level.
TD Absolute Retracement, TD Relative Retracement and TD Arc are licensed
trademarks of Tom DeMark.