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8/14/2019 TD Retracement magazine article.pdf
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MARKET RHYTHM and PRICE PROJECTIONS
581-584 S&P Downside Projection
Those who dare to use a crystal ball to forecast the future must be prepared to eatshattered glassAlan Abelson, Barrons
Most everyone possesses an opinion regarding the direction of the stock market. Oftentimes the outlook is more a function of ones emotions rather than rational and deliberate
thinking analysis. Forecasts made in the media by supposed Wall Street pundits are also
influential in swaying market opinion.
We have developed methodologies designed to forecast the price behavior of markets and
these techniques have their roots grounded both in mathematics and in the laws of nature.
The approach we employ is totally objective and mechanical. Specifically, we have
concluded through extensive research and tests that once important mathematicallyderived levels of price support and resistance are first qualified and then exceeded,
subsequent price direction is preordained and therefore the markets response is togravitate toward its next critical level of support and resistance.
Market timing is a discipline of chart analysis that is distinguished from conventional
technical analysis of price activity. Specifically, market timing has a prescribed set ofrules that make it totally objective and defined, whereas conventional technical analysis
is fraught with subjectivity and ambiguity. Market timing derives a single outlook and
outcome, while technical analysis is often associated with a myriad of possibilities.
A review of various historical markets price movement and behavior will introduce you
to the basic tenets of TD Absolute Retracement, a handy tool for projecting, with ahigh degree of mechanical precision, likely levels of price support and resistance. This
exercise will also enable you to apply this indicator to your own analysis in the future.
The golden mean is a ratio dominant and pervasive throughout nature. Its 61.8% valueis a derivative of the basic Fibonacci number series that begins with the whole numbers 1
and 2 and then proceeds to higher successive numbers that are sums of the two most
recent consecutive numbers in the series. For example, 1 + 2 = 3 and that is the thirdnumber in the series. By adding 3 + 2 the fourth number 5 appears. This process
continues forward and 8, 13, 21, 34, 55, 89, 144, 233, 377, etc are the consecutive
numbers in the series.
As these values progress successively higher, and one were to divide a preceding number
by a succeeding number, the ratio 61.8% is produced. This is the only series of numbersthat possess such properties.
By subtracting this ratio from unity, or 100%, an alternative ratio of 38.2% exists. Further
by averaging the two key ratios of 61.8% and 38.2%, one arrives at 50%. These three
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ratios are critical in projecting downside support levels when an index or market declines
and likewise these same ratios are important in arriving at upside resistance levels as
well.
While these ratios have become more commonly known in the markets in recent years,
the distinct application of these ratios within the TD Absolute Retracement indicatormakes their usage more objective and mechanical. The downside rations of 61.8%, 50%
and 38.2% are applied to prices from a significant high and the upside ratios of 138.2%,
150% and 161.8% are utilized with major price lows. This approach removes thesubjectivity normally associated with the application of Fibonacci ratios.
The following examples demonstrate the value of these ratios in deriving critical
downside and upside levels. Upon completion of this review, one can easily conclude theimportant role that mathematics assumes when applied to making market projections.
Although we can cite many examples when price has traveled precisely from one TD
Absolute Retracement level to another, we will highlight some major market indexexamples with which many traders are familiar. Unfortunately, at the time these major
market reversals occurred without the TD Absolute Retracement indicator one wouldhave had no idea nor conviction that the market was about to turn.
Important Market Price Reversals
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On July 16, 1987, the London FTSE 100 Index recorded its all time high and closed at
245.52. Multiplying this price by the TD Absolute Retracement upper ratio of 61.8%
produced a downside price objective of 151.73 and the subsequent November 10, 1987market panic low was 1510.50. (see chart #1)
Chart 1
Similarly, the August 25, 1987 DJIA all time price high was 2746.62. Multiplying this
value by the TD Absolute Retracement upper ratio of 61.8% projected downside to the
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both July and August 1992 price held the 3rd
and final downside level at 38.2% of
14,865.86 and then again in June and July 1995 and a number of months in 1998 only to
succumb to the weight of the market in 2001 and to breakdown below the lowest TDAbsolute Retracement level. (see chart #3)
Chart 3
However, the TD Absolute Retracement indicator can be applied both upside, as well asdownside, to arrive at price projections. While the downside ratios are 61.8%, 50%, and
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38.2%, the upside ratios are 138.2%, 150%, and 161.8%. From the October 1998 low of
12,780 the TD Absolute Retracement 3rd
upside objective upside of 161.8% was 20,690
and that was only slightly exceeded in March of 2000. Since the market was able to rallyupside to a TD Absolute Retracement minimum threshold level of 138.2% of the low, the
projection downside can be re-initialized and recalculated and the new projection
downside becomes 7792.80. From that low the market has since rallied. (see chart #4).
Chart 4
Lets evaluate the US stock index market from more recent tops and bottoms. The S & P
cash index made its all time high on March 24 2000. The close that day was 1527.46. By
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multiplying this close by the upper TD Absolute Retracement ratio of 61.8% and the high
that day by the middle ratio of 50.0%, two downside objectives are calculated943.97
and 776.43. The September 21, 2001 terrorist low was less than 1.00 point away at944.75 and subsequent to a rally, the S & P cash declined just below the 50.0% downside
level of 776.43 by 0.75 points on July 24, 2002 and then again on October 10, 2002 when
it once again declined intraday below this level. (see chart #5). During the same period,the Dow Jones Industrial Average high was recorded on January 14, 2000. By
multiplying the close that day of 7,261.6 by 61.8%, a downside price projection was
calculated and fulfilled for one day only on October 10, 2002. (see chart #5) Amazingly,this low was projected back in early 2000, almost 3 years earlier.
Chart 5
The FTSE 100 made its all time high on December 30, 1999. By multiplying the closeand high this day by the 61.8% and 50% TD Absolute Retracement ratios, the downside
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objectives were fulfilled on September 21, 2001just as the S & P had doneand then
in & late January and in early March in 2003. (see chart #6)
Chart 6
Now lets apply the key ratios of this important indicator to the recent markets
significant highs and lows. By multiplying the two lower TD Absolute Retracement
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upside ratios --138.2% and 150%, by the S & P Cash Index October 10, 2002 low, one
arrives at 1062.24 and 1153.00 as the upside price projections. Both these levels served to
repel price for a period of time. The second higher level was resistance just recently inearly 2004. (see chart #7)
Chart 7
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What is TD Absolute Retracementprojecting NOW?
When placed in context of the 1929-30 DJIA stock market decline/crash, one can see that
the S & P cash rally from October 2003 is mimicking the 1929-30 rally remarkably
closely.
The 1929 market high was recorded on September 3, 1929. The TD Absolute
Retracement upper two downside projections from that high were 238.60 and 193.00,respectively. By November 13 of the same year both downside projections had been
fulfilled. Projecting upside from that low days close, there were two lower upside ratio
objectives of 274.46 and 297.90. By April 16 1930 the DJIA had topped above 297.20.From that price, it is all history with the DJIA bottoming below 40 in July 1932. (see
chart #8) These two successively higher highs are equivalent to the S & P cash recent
successive upside highs of 1062.40 and 1163.23.
Chart 8
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If the current S & P cash index has in fact recorded its high on March 5, 2004 at 1163.23
then expect the lowest ratio level that was calculated by multiplying the March 2000 highclose by 38.2% from the March 2000 high to be fulfilled. Also since the recent rally
from the S & P cash October 2003 low to 1163.23150.02%-- has been able to move
sufficiently high to reinitialize the TD Absolute Retracement projection downside, thesecalculations amazingly confirm what the March 2000 projections were. (see chart #9)
Chart 9
Off of the recent March 5, 2004 high of 1163.23, the 61.8% downside projection is now718.87 while 50% ratio projection is almost identical to the 38.2% ratio projection made
in March 2000it is 581.61 versus 583.48. Whereas there may be no comfort
whatsoever in knowing that the S & P currently possesses risk of 50% from the recent
high, there is mathematical comfort knowing that both important highs project downsideto a level that successfully confirms one another, thereby lending credibility to its
derivation and likelihood.