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November 2001

< TRADE SECRETS >

Tom DeMark: Identifying

Market Turning Points
The market timer has sought to make technical analysis objective and unemotional.
By Lindsay Glass
ON SEPT. 20, after the Standard &
Poors 500 Index recorded what was then
its lowest closing price of the year, market
technician Tom DeMark reiterated that
945 was a critical price level for the index.
Actually, the exact price is 944.75, and
the 959.6 level will be an early warning,
he said. DeMark had first made that call in
May by using his TD Sequential and TD
Absolute Retracement technical indicators.
On Friday, Sept. 21, European markets
were trading considerably lower. U.S. index
futures on the overnight sessions were also
well below their previous days close.
The FTSE 100 Index just reached its
absolute retracement, and the intraday
sequential just finished a 13-buy TD
Countdown pattern, DeMark said early
that morning. It looks very similar to how
the 1987 low occurred. Thats it. The [U.S.]
markets are a buy on the open. Weve
been looking for this for over a week.
Futures on the S&P 500 Index opened
at their low of 940 and then moved immediately higher, making their high at the TD
Trend Factor level and ending with a TD
Camouflage buy signal, which indicated a
higher high the following Monday. Over the
next several days, the S&P 500 moved
back above 1,000, completed a TD shortterm three-day pattern before a one-day
pullback and then subsequently moved
higher into a nine-day TD Sell Setup. The
indicators worked well in the midst of a
difficult period when people were unsure
of how to value the markets, DeMark says.
DeMark has made a career out of calling market turns as exactly as possible.
Bruce Babcock, late author and founder of

Commodity Traders Consumer Report, once

said that DeMarks performance regarding
the market strains credulity.
In the past 30 years, many of the
biggest and best investors have sought
out DeMarks market analysis and commentaryamong them, hedge fund managers Paul Tudor Jones, Michael Steinhardt and George Soros.
DeMark, 54, is currently a consultant
to SAC Capital Management LP, for which
he has provided market timing calls for

says. I wanted to make things objective

and unemotional.
DeMarks insistence on a mechanical,
mathematical approach to market analysis led him to devise such indicators as TD
Moving Average I, TD Sequential and TD
Range Expansion Index, which are designed to predict market moves not only
when a security has been following a particular trend but also when it has been
trading within a range without a set pattern. Most money managers, using tech-

DISCIPLINE AND MONEY MANAGEMENT ARE ACTUALLY MORE

IMPORTANT FOR SUCCESS THAN
THE MARKET ANALYSIS ITSELF.
more than five years. Market timing is
only one-third of what is needed to succeed in the trading industry, DeMark says.
Discipline and money management are
the other two critical areas in trading, and
they are actually more important for success than the market analysis itself.
DEMARK STARTED CALLING market tops
and bottoms in 1971, when he began work
as an analyst at NN Investment Services
in Milwaukee. He began studying technical analysis tools in order to find their
weaknesses after growing dissatisfied
with the tools then available. A lot of the
market analysis work that I uncovered
was very subjective and interpretive, he

nical analysis, incorporated some sort of

trend-following approach such as moving
averages, DeMark says. These indicators,
regardless of the period used, work fine
when a market is trending but fail miserably when a market is in a trading range.
Technical analysis is better than fundamental analysis, according to DeMarks
approach, because the trading indications
are more immediate. Supply and demand
ultimately determine the direction and
level of each markets price, he says. Fundamentals and economics can show you
this. Market prices and their movements
do it sooner than the underlying data.
DeMarks indicators use a securitys
past price movements to anticipate future

B l o o m b e r g M a r ke t s
November 2001

F O CU S E q u i t y Tr a d i n g

Tom DeMark has

been forecasting
market turns for
the past 30 years.

P H OTO G RA P H BY PAU L G E R O

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B lo o m b e r g M a r k e t s
November 2001

< TRADE SECRETS >

key price zones. Using these indicators, DeMark has forewarned his clients of many
of the significant market turns so far this
year. In addition to the Sept. 21 low, his
indicators identified the March and April
bottoms in the S&P 500 and the indexs
subsequent top in May. They also forecast
the March lows in gold, the June peak in
crude oil and the August bottom in silver.
In the past, DeMark has forecast,
among other events, the 1980 and 82 lows
in U.S. interest rates, the October 1990 low
in the Dow Jones Industrial Average, the
successive peaks in the yen in 1998 and the
June 1998 low in the FTSE 100.
OF COURSE, DEMARKS indicators arent infallible. Jones once remarked that when TD
Sequential doesnt work, it really doesnt

F O CU S E q u i t y Tr a d i n g
work. DeMark says TD Sequential has
correctly predicted 13 of the last eight
market turns, by which I mean that it has
sometimes been premature.
DeMark called one of his indicators TD
Camouflage because it focuses on more

a closing price with that days open and

the previous days close and also the days
highs and lows with the highs and lows
two days earlier.
DeMarks ability to look at things others
ignore and to do it in a strictly empirical

MOVING AVERAGES WORK FINE WHEN A

MARKET IS TRENDING BUT FAIL MISERABLY
WHEN A MARKET IS IN A TRADING RANGE.
than investors usual preoccupation. This
price pattern is camouflaged from a lot of
people, as they are predisposed by the
financial reporting to look only at the
close, he says. The indicator compares

way has made his research stand out over

the past 30 years.
LINDSAY GLASS is business analyst for technical
analysis at Bloomberg in New York.
lglass@bloomberg.net

DeMark Indicators on the Bloomberg Service

Type G <Go> for the Graph Worksheet Main Menu,
which enables you to customize and save technical
analysis studies, including DeMark Indicators. Type 1
<Go> to add a study. Then tab in to the Graph Title
field, enter a name and press <Go> <Page Fwd>. Type

1 <Go> to select historical data. Enter a date range and

period in the respective fields, and press <Go>. Select a
graph type from the menu that appears, and then type 1
<Go> to add a study. Press <Page Fwd> to access the
second page of available studies, and then type 9 <Go>
for DeMark Indicators (figure A).
Select an indicator from the menu
and press <Menu> to display the
graph. The title for the technical
analysis study that you created
now appears on the G menu, allowing you to view it again.
To quickly access DeMark technical analysis tools, select a security or commodity and then type
GEG <Go> for the Graph Worksheet Examples function. Type 5
<Go>, and then select a DeMark
Indicator from the menu. You can
type 99 <Go> from the graph that
appears to save that particular
analysis tool. Type G <Go> and
select your DeMark study from the
Graph Worksheet Main Menu.
From that menu, type 99 <Go>
1 <Go> to send a graph work sheet
FIGURE A
to another user of the Bloomberg
1 Type G <Go> 1 <Go>. Enter a title, and press <Go> <Page Fwd>. Type 1 <Go>,
Professional service.
enter a period and date range and press <Go>.
2 Type 1 <Go> for a bar chart. Then type 1 <Go> <Page Fwd> 9 <Go> to

display the list of DeMark Indicators.

JOHN DIXON