Trend Forecasting with Technical Analysis

1 Trend ForecastingWithTechnicalAnalysisTrend ForecastingWithTechnicalAnalysisUNLEASHI NG THE HIDDEN POWER OF INTERMARKETANALYSIS TO BEAT THE MARKETLOUIS B. MENDELSOHNFORWORD BY JOHN J. MURPHYTRADESECRETST rendForecastingWith TechnicalAnalysis Unleashing the Hidden Powerof Intermarket Analysisto Beat the MMEENNDDEELLSSOOHHNNF oreword by JJoohhnn MMuurrpphhyyTitles in the Trade Secrets SeriesTrend Forecasting with Technical Analysis :Unleashing the Hidden Power of Intermarket Analysis to Beat the Market by Louis B. Mendelsohn7 Chart Patterns That Consistently MakeMoney by Ed Downs Charting Made Easyby John MurphyThe Four Biggest Mistakes in Futures Tradingby Jay KaeppelThe Four Biggest Mistakes in Options Tradingby Jay KaeppelBar Chart Basics by Darrell JobmanTrading System Secrets: Selecting a WinningSystem by Joe KrutsingerProfit Strategies: Unlocking TradingPerformance with Money Management by David Stendahl Simple Asset Allocation Strategies by Roger Gibson Intermarket Analysis tools that build andexpand upon the single-market Analysis methodswhich defined Technical Analysis in the late20th century demand serious attention.

2 Louis B. MendelsohnCopyright 2000 Market Technologies CorporationPublished by Marketplace BooksAll rights reserved. VantagePoint Intermarket Analysis Software, Market Technologies Corporation and ProfitTaker aretrademarks of Market Technologies Corporation. Synergistic Market Analysis , Synergistic Analysis and Market Synergy are trademarks of Louis B. Mendelsohn. Investor s Business Daily is a registered trade-mark of Investor s Business Daily, Inc. Technical Analysis of Stocks & Commodities is a trademark ofTechnical Analysis , Inc. Standard & Poor s 500 is a trademark of The McGraw-Hill Companies, Inc. S&P500 and S&P 100 are registered trademarks of The McGraw-Hill Companies, Inc. Nikkei Stock Average and Nikkei are registered trademarks of Nihon Keizai Shimbun Inc. CNBC is a trademark of NationalBroadcasting Company, Inc. CNN is a trademark of Cable News Network LP, LLLP, a Time WarnerCompany.

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5 Requests forpermission or further information should be addressed to the Permissions Department at Traders publication is designed to provide accurate and authoritative information and the views and opinionsof the author in regard to the subject matter covered. It is sold with the understanding that neither the pub-lisher, copyright holder, nor the author is engaged in (i) providing commodity trading advice based on, ortailored to, the commodity interests or cash market positions or other circumstances or characteristics of anyparticular client, or (ii) rendering investment, legal, accounting or other professional services. If trading orinvestment advice or other expert assistance is required, the services of a competent and appropriatelylicensed person should be a Declaration of Principles jointly adopted by a Committee of theAmerican Bar Association and a Committee of 1-883272-91-2 Printed in the United States of book, along with other books, are available at discounts thatmake it realistic to provide them as gifts to your customers, clientsand staff.

6 For more information on these long-lasting, cost-effectivepremiums, please call John Boyer at 800-424-4550 or e-mail him .. 11 Preface .. 15 Introduction .. 17 Chapter 1 TRADING IN THE GLOBAL ECONOMY Have YourTrading 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 VisionCan 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 Playthe Markets, or You Can Timethe 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 aShrinking World .. 45 Intermarket Analysis in the Equity and Commodity Markets.

7 46No Market Is Exempt From Globalization .. 497 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 ForecastingBeats 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 .. 66A 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 AreGoing and Use This Information to Your Advantage.

8 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.. 918 Chapter 6 NEURAL NETWORKS How to Raise Your Financial IQto 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 Hereand 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.

9 1159 ForewordThey say timing is everything. Nowhere is that more true thanin 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 Cur-rency Markets( John Wiley & Sons, 1991). At that time, the principlesof intermarket Analysis seemed heretical by suggesting that single-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 branchof Technical 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.

10 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 Treasury s equally hard to argue with how the tripling of oil prices during1999 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 duringTrend Forecasting with Technical Analysis111999, they had a predictably bearish impact on interest-rate sectors ofthe stock market (like financial stocks and utilities) and oil-sensitivegroups like the airlines.