2 replies to this topic

[TTHQ Staff]

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.  

[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.