T R A D E S E C R E T S TTrreenndd FFoorreeccaassttiinngg TTeecchhnniiccaall WWiitthh AAnnaallyyssiiss UNLEASHING THE HIDDEN POWER OF INTERMARKET ANALYSIS TO BEAT THE MARKET LOUIS B. MENDELSOHN FORWORD BY JOHN J. MURPHY Trend Forecasting With Technical Analysis Unleashing the Hidden Power of Intermarket Analysis to Beat the Market LL BB.. MM BBYY OOUUIISS EE NN DD EE LL SS OO HH NN Foreword by JJoohhnn JJ.. MMuurrpphhyy 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 Easyby John Murphy The Four Biggest Mistakes in Futures Trading by Jay Kaeppel The Four Biggest Mistakes in Options Trading by Jay Kaeppel Bar Chart Basics by Darrell Jobman Trading System Secrets: Selecting a Winning System by Joe Krutsinger Profit Strategies: Unlocking Trading Performance with Money Management by David Stendahl Simple Asset Allocation Strategies by Roger Gibson “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. “VantagePoint Intermarket Analysis Software,”“Market Technologies Corporation” and “ProfitTaker” are trademarks 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 of Technical Analysis,Inc.“Standard & Poor’s 500”is a trademark of The McGraw-Hill Companies,Inc.“S&P 500”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 National Broadcasting Company, Inc.“CNN” is a trademark of Cable News Network LP, LLLP, a Time Warner Company.The “Nasdaq-100 Index,”“Nasdaq-100,”“Nasdaq Composite”and “Nasdaq”are registered trade- marks of The Nasdaq Stock Market,Inc.“Nasdaq Japan”is a service mark of The Nasdaq Stock Market,Inc. “Futures”is a registered trademark of Futures Magazine Inc. “The New York Stock Exchange”and “NYSE Composite Index”are registered trademarks of the New York Stock Exchange, Inc. 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Contents 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 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