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< T R A D E S E C R E T S >

Commodity Traders Consumer Report, oncesaid that “DeMark’s performance regardingthe market strains credulity.”

In the past 30 years, many of thebiggest and best investors have soughtout DeMark’s market analysis and com-mentary—among them, hedge fund man-agers Paul Tudor Jones, Michael Stein-hardt and George Soros.

DeMark, 54, is currently a consultantto SAC Capital Management LP, for whichhe has provided market timing calls for

more than five years. “Market timing isonly one-third of what is needed to suc-ceed in the trading industry,” DeMark says.“Discipline and money management arethe other two critical areas in trading, andthey are actually more important for suc-cess than the market analysis itself.”

DEMARK STARTED CALLING market topsand bottoms in 1971, when he began workas an analyst at NN Investment Servicesin Milwaukee. He began studying techni-cal analysis tools in order to find theirweaknesses after growing dissatisfiedwith the tools then available. “A lot of themarket analysis work that I uncoveredwas very subjective and interpretive,” he

says. “I wanted to make things objectiveand unemotional.”

DeMark’s insistence on a mechanical,mathematical approach to market analy-sis led him to devise such indicators as TDMoving Average I, TD Sequential and TDRange Expansion Index, which are de-signed to predict market moves not onlywhen a security has been following a par-ticular trend but also when it has beentrading within a range without a set pat-tern. “Most money managers, using tech-

nical analysis, incorporated some sort oftrend-following approach such as movingaverages,” DeMark says. “These indicators,regardless of the period used, work finewhen a market is trending but fail miser-ably when a market is in a trading range.”

Technical analysis is better than fun-damental analysis, according to DeMark’sapproach, because the trading indicationsare more immediate. “Supply and demandultimately determine the direction andlevel of each market’s price,” he says. “Fun-damentals and economics can show youthis. Market prices and their movementsdo it sooner than the underlying data.”

DeMark’s indicators use a security’spast price movements to anticipate future

Tom DeMark: IdentifyingMarket Turning PointsThe market timer has sought to make technical analysis objective and unemotional.

B y L i n d s ay G l a s s

‚ON SEPT. 20, after the Standard &Poor’s 500 Index recorded what was thenits lowest closing price of the year, markettechnician Tom DeMark reiterated that945 was a critical price level for the index.“Actually, the exact price is 944.75, andthe 959.6 level will be an early warning,”he said. DeMark had first made that call inMay by using his TD Sequential and TDAbsolute Retracement technical indicators.

On Friday, Sept. 21, European marketswere trading considerably lower. U.S. indexfutures on the overnight sessions were alsowell below their previous day’s close.

“The FTSE 100 Index just reached itsabsolute retracement, and the intraday sequential just finished a 13-buy TDCountdown pattern,” DeMark said earlythat morning. “It looks very similar to howthe 1987 low occurred. That’s it. The [U.S.]markets are a buy on the open. We’vebeen looking for this for over a week.”

Futures on the S&P 500 Index openedat their low of 940 and then moved imme-diately higher, making their high at the TDTrend Factor level and ending with a TDCamouflage buy signal, which indicated ahigher high the following Monday. Over thenext several days, the S&P 500 movedback above 1,000, completed a TD short-term three-day pattern before a one-daypullback and then subsequently movedhigher into a nine-day TD Sell Setup. “Theindicators worked well in the midst of adifficult period when people were unsureof how to value the markets,” DeMark says.

DeMark has made a career out of call-ing market turns as exactly as possible.Bruce Babcock, late author and founder of

‘DISCIPLINE AND MONEY MAN-AGEMENT ARE ACTUALLY MORE IMPORTANT FOR SUCCESS THANTHE MARKET ANALYSIS ITSELF.’

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FO CUS E q u i t y Tr a d i n g

PHOTOGRAPH BY PAUL GERO

Tom DeMark hasbeen forecastingmarket turns forthe past 30 years.

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FO CUS E q u i t y Tr a d i n g

key price zones. Using these indicators, De-Mark has forewarned his clients of manyof the significant market turns so far thisyear. In addition to the Sept. 21 low, hisindicators identified the March and Aprilbottoms in the S&P 500 and the index’ssubsequent top in May. They also forecastthe March lows in gold, the June peak incrude oil and the August bottom in silver.

In the past, DeMark has forecast,among other events, the 1980 and ‘82 lowsin U.S. interest rates, the October 1990 lowin the Dow Jones Industrial Average, thesuccessive peaks in the yen in 1998 and theJune 1998 low in the FTSE 100.

OF COURSE, DEMARK’S indicators aren’t in-fallible. Jones once remarked that when TDSequential “doesn’t work, it really doesn’t

work.” DeMark says TD Sequential “hascorrectly predicted 13 of the last eight market turns, by which I mean that it hassometimes been premature.”

DeMark called one of his indicators TDCamouflage because it focuses on more

than investors’ usual preoccupation. “Thisprice pattern is camouflaged from a lot ofpeople, as they are predisposed by the financial reporting to look only at theclose,” he says. The indicator compares

a closing price with that day’s open andthe previous day’s close and also the day’shighs and lows with the highs and lowstwo days earlier.

DeMark’s ability to look at things othersignore and to do it in a strictly empirical

way has made his research stand out overthe past 30 years.„

LINDSAY GLASS is business analyst for technical

analysis at Bloomberg in New York.

lglass@bloomberg.net

MOVING AVERAGES ‘WORK FINE WHEN AMARKET IS TRENDING BUT FAIL MISERABLYWHEN A MARKET IS IN A TRADING RANGE.’

< T R A D E S E C R E T S >

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, allow-

ing you to view it again.

To quickly access DeMark tech-

nical analysis tools, select a securi-

ty or commodity and then type

GEG <Go> for the Graph Work-

sheet 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

to another user of the Bloomberg

Professional service.

JOHN DIXON

DeMark Indicators on the Bloomberg Service

F I G U R E A

1 Type G <Go> 1 <Go>. Enter a title, and press <Go> <Page Fwd>. Type 1 <Go>,

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.