Trend Forecasting With Technical Analysis Chapter 1 ppt

Titles in the Trade Secrets Series Trend Forecasting With Technical Analysis:Unleashing the Hidden Power of Intermarket Analysis to Beat the Market by Louis B.. “VantagePoint Intermarket

Trend Forecasting With Technical

T R A

A D E

Titles in the

Trade Secrets Series

Trend Forecasting With Technical Analysis:Unleashing the Hidden Power of

Intermarket Analysis to Beat the Market

by Louis B Mendelsohn

7 Chart Patterns That Consistently Make

Money by Ed Downs

Charting Made Easy by John Murphy

The Four Biggest Mistakes in Futures Trading

by Jay Kaeppel

The Four Biggest Mistakes in Options Trading

by Jay Kaeppel

Profit Strategies: Unlocking Trading

Performance with Money Management

by David Stendahl

Simple Steps to Option Trading Success

by Jim Graham and Steve Lentz

7 Steps to Success Trading Options Online

by Larry Spears

“Intermarket analysis tools — that build and expand upon the single-market analysis methods which defined technical analysis in the late 20th century — demand serious attention.”

— Louis B Mendelsohn

Copyright © 2000 Market Technologies Corporation

Published by Marketplace Books

All rights reserved.

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Foreword 11

Preface 15

Introduction 17

Chapter 1 TRADING IN THE GLOBAL ECONOMY — Have Your Trading Strategies and Profits Kept Pace? 25

The Markets Are Constantly Evolving 26

The World’s Futures and Equity Markets Are Linked 27

Emerging Forces Usher in the New Global Economy 29

Market Volatility and Financial Crises Are Here to Stay 31

Chapter 2 SINGLE-MARKET ANALYSIS — Trading With Tunnel Vision Can Put You on the Losing Side of a Trade 35

While Numbers Don’t Lie, They Can Be Deceiving 36

The Goal Is to Forecast Market Trend Direction 36

You Can Play the Markets, or You Can Time the Markets 37

Technical Analysis Has Not Kept Pace With the Markets 38

Traders Need to Take Off Their Blinders 41

Chapter 3 INTERMARKET ANALYSIS — Seizing Trading Opportunities in a Shrinking World 45

Intermarket Analysis in the Equity and Commodity Markets 46

No Market Is Exempt From Globalization 49

7

Why Markets Converge or Diverge 50

Intermarket Dynamics Must Be Taken Into Consideration 51

Early Attempts at Intermarket Analysis Fall Short 51

Tracking Related Markets Pays Off 52

Full Field of Vision Is Critical 53

Intermarket Analysis: In the Right Place at the Right Time 56

The Only Thing Certain Is Uncertainty Itself 57

Chapter 4 TODAY’S MARKETS HAVE CHANGED — Why Trend Forecasting Beats Trend Following and How Traders Can Profit 59

Moving Averages Are Lagging Indicators 60

Moving Averages Are Popular — But Something’s Missing 62

Moving Average Crossovers Lead to Whipsaws 63

Computing a Simple Moving Average Is Easy 65

Displaced Moving Averages: Close But “No Cigar” 66

A New Way to Forecast Moving Averages 66

Leading Indicators Give You a Competitive Edge 69

Chapter 5 VANTAGEPOINT FORECASTS MARKET DIRECTION — How to Get a Sneak Preview of Where the Markets Are Going and How to Use This Information to Your Advantage 71

VantagePoint Monitors Major Financial Markets 71

Five Neural Networks Make Independent Forecasts 73

What VantagePoint’s Daily Report Tells You 76

Intermarket Charts Show You What’s Ahead 80

VantagePoint Is Quick and Easy 82

How to Find a Good Trade 83

Here’s How to Get Added Confirmation 84

Day and Position Trading With Tomorrow’s Price Forecasts 88

Stop Placement Based on Forecasts, Not Hunches 89

Other Markets Give Added Confirmation 90

How To “Cherry-Pick” the Best Trades to Take 91

8

Chapter 6

NEURAL NETWORKS — How to Raise Your Financial IQ

to Stay Ahead of the Competition 93

Neural Networks Combine Technical and Intermarket Data 94

Neural Networks Learn Patterns and Make Forecasts 95

Chapter 7 THE NEXT HORIZON — Where Do We Go From Here and What Does This Mean for Traders? 99

There Will Never Be a Financial Crystal Ball 101

Trading Resource Guide 103

About the Author and Market Technologies Corporation 115

9

They say timing is everything Nowhere is that more true than

in the financial markets It’s especially timely that LouMendelsohn’s book on intermarket analysis should appear atthe start of the new millennium At the start of the last decade, I pub-

lished a book on the same topic — Intermarket Technical Analysis:

Trading Strategies for the Global Stock, Bond, Commodity, and rency Markets ( John Wiley & Sons, 1991) At that time, the principles

Cur-of intermarket analysis seemed heretical by suggesting that market analysis (that had been utilized for the past century by mar-ket technicians) was no longer adequate By the end of the decade,those seemingly radical ideas had become so accepted that theMarket Technicians Association listed intermarket analysis as a branch

single-of technical analysis

It’s hard, for example, for any market analyst who lived through theAsian crisis of 1997 to dispute the existence of global linkages — andthe interdependence of all financial markets The collapse of oneAsian currency in the summer of that year caused a domino effectthroughout all of Asia Before long, Asian bankers were raising inter-est rates to stem the spreading currency collapse That had a devas-tating effect on the Asian stock markets That deflationary threatpushed global commodities into a free-fall and caused a massive rota-tion out of global stocks into U.S Treasury bonds

It’s equally hard to argue with how the tripling of oil prices during

1999 pushed global interest rates higher and caused a bear market inbonds That prompted the Federal Reserve Board to start raising inter-est rates in the middle of that year A series of Fed tightenings overthe next twelve months had a predictably restraining effect on thebull market in stocks The impact of rising oil prices (and rising inter-est rates) could also be seen in sector rotations within the stock mar-ket While rising oil prices were bullish for the energy sector during

Trend Forecasting With Technical Analysis 11

1999, they had a predictably bearish impact on interest-rate sectors ofthe stock market (like financial stocks and utilities) and oil-sensitivegroups like the airlines By the middle of the year 2000, economistswho had ignored the surging oil market during 1999 were creditingthat surge with slowing down the U.S economy.

In case anyone wasn’t convinced a decade ago, market eventssince then have amply demonstrated that all markets are linked —and that a thorough market analysis has to take these intermarketrelationships into consideration Lou Mendelsohn’s book takes thoseintermarket ideas to an even more practical level As he correctlypoints out, the problem with intermarket relationships is that thereare so many of them One of his intermarket trading models incor-porates as many as nine related markets With so many markets inter-acting at the same time, it has become increasingly difficult for thehuman mind to make sense of it all Enter neural networks

One of Mendelsohn’s greatest contributions to intermarket analysishas been his application of neural networks to the process He showshow a neural network can take any number of related factors intoconsideration, analyze them, and draw some practical conclusions.And, those conclusions lead to the real benefit — winning markettrades The results of two decades of pioneering work has producedhighly successful intermarket trading programs Since I was the onewho first described these intermarket principles ten years ago, I feelindebted to Mendelsohn for proving that those ideas do in fact workand that they can be profitably applied to the financial markets.Neural networks even incorporate fundamental factors into techni-cal and intermarket work When talking about things like inflationand interest rates, the technical analyst sounds more like an econo-mist than a chartist Mendelsohn incorporates intermarket, funda-mental, and technical considerations into an approach that he calls

“synergistic market analysis” — a term I first heard him use when Iinterviewed him on CNBC™ For some purists, that may be a prob-lem For the rest of us, it’s just another step in the evolution of tech-nical analysis Intermarket work has a tendency to blend the funda-mental and the technical — a trend that I expect to accelerate in thenew millennium And I suspect that many of the techniquesdescribed by Mendelsohn in this pioneering work will play an impor-tant role in helping to bring about those changes

12 Trade Secrets

Mendelsohn warns that what worked for technical analysts in theold century may not work in the new one Many of us started outusing pencils and rulers We graduated to hand-held calculators be-fore switching over to computers Now comes neural networks.Different times demand different tools An increasingly interdepen-dent financial marketplace will demand an even better set of tools.

It will also demand a more comprehensive approach to marketanalysis that incorporates all geographic regions and all markets —

in other words, an intermarket approach

— John Murphy

▲ ▲ ▲ ▲ ▲ ▲

Mr Murphy is also the author of Technical Analysis of the

Financial Markets and The Visual Investor and is the

presi-dent of MurphyMorris.com

Trend Forecasting With Technical Analysis 13

This book explores the application of intermarket analysis,

which analyzes the relationships between financial marketsand their influences on each other It examines the critical rolethat intermarket analysis plays in assisting traders to identify and antic-ipate changes in market direction in today’s globally interconnectedfinancial markets

These markets include stock indexes such as the Dow Jones trial AverageSM

Indus-, London’s FTSE™ 100 Index, the Nasdaq Composite®

Index, the Nasdaq-100 Index®, the Nikkei Stock Average®( Japan) andthe Standard & Poor’s 500™Stock Index; currencies such as the Britishpound, Japanese yen, Swiss franc and the U.S Dollar Index; energymarkets such as crude oil, gasoline and heating oil; interest rate mar-kets such as the eurodollar, Treasury bonds and Treasury notes; aswell as individual equities

As the burgeoning global economy of the 21st century, fostered byadvancements in information technologies, contributes to the furtherintegration of the financial markets, intermarket analysis will become

an integral part of the overall field of technical analysis Intermarketanalysis empowers traders to make more effective trading decisionsbased upon the linkages between related financial markets By incor-porating intermarket analysis into your trading strategies, rather thanlimiting your scope of analysis to each individual market, these rela-tionships and interconnections between markets will work for yourather than against you

Suggestions are made for how intermarket analysis can be used inconjunction with traditional single-market technical indicators to pro-vide a more comprehensive framework of analysis and broadenedtrading perspective This book also introduces VantagePoint Intermar-ket Analysis Software which has achieved an astounding accuracyrate of nearly 80% at forecasting market direction, and offers insights

Trend Forecasting With Technical Analysis 15

16 Trade Secrets

into how day traders and position traders in both the futures andequity markets can use this powerful analysis tool to improve theirtrading performance and achieve a competitive advantage over othertraders

This book will be of interest to both experienced individual andprofessional traders as well as newcomers to the financial marketswho want to create wealth in today’s global markets