Tom DeMark on Bloomberg

Tom DeMark, founder and chief executive officer at DeMark Analytics, explains the technical reasons why he sees the S&P 500 near a market top. He speaks with Bloomberg’s Alix Steel on "Bloomberg Daybreak: Americas." (Source: Bloomberg)

 

You must use Trend Lines to Predict Stock Price

: Tom DeMark

a little more discussion here on the TD lines themselves and then then I'll refer to the charts because what the charts are going to do is going to take the lines they're going to draw the lines for me at the same time they're gonna may spray price projections and me didn't want to confuse you with lines appearing on the chart without me taking you down that road first so you know what what I'm trying to accomplish now what I showed you before was a series of lower prices and I identified TD level 1 point now here is a series of three of them and assume this is our current D now obviously I don't consider this one because I'm not a part of the most recent to the most recent to being right here now if I extend this line down into the future I'll draw a trend line a TD line now what I observe this is many many years ago 20 years ago 25 years ago is that once a trend line had been our TD line had been properly constructed once I penetrated that TD lying to the upside prices reflected themselves to the upside and by reflected I mean there was symmetry in the market the movement below the trend line reappeared only a mirror image above the trend line now let me explain that to you once I constructed the trend line I observed to see the lowest price movement below that trend line so I'll be from point one point number one point number two level one extended into the future I would identify the lowest price point which in this case is here and then I would go to the trend line immediate immediately above it which is right here and I would calculate the difference between this the value here on the trend line precisely on a trend line and that particularly low and what I found or observed in the past is that once this trend line had been penetrated to the upside and had been fired not only the prices break to the upside but they would satisfy a price calculation of a movement which would replicate the movement below the trend the line now let me explain to you a little further here say for example this value just to simplify things on that particular trend line we're 20 and say the deepest price low here was 14 that is XYZ stock or whatever it is without a volatility you can see here but say there were some news and prices got hit pretty badly and it was way overdone whatever the excuse was and I'm sure reporters and you see this every day in the walls we journal there's always an excuse me the market sells off because earnings are we're down in the final next quarter say ibm's earnings were down there was where else could the price school had to go down well then the next quarter the earnings are down as well and prices go up well they weren't down as much as people expected I mean it's there's always an excuse and if you want to go to wall street journal' you can always find an excuse but if you're a market parasite your market timer like I am I don't care I don't care what the excuses as long as I make you money in the market now if you take a look at the getting back to this particular trendline the value here on this particular day is 20 the deepest low is 14 you would subtract 14 from 20 and you get 6 now see at this particular the point on the trendline is 19 precisely on this particular day replacement open right here you've penetrated the trendline at 19 now obviously there's gonna be fractions involved and everything else and I'll show you how to calculate this very simple math but once you penetrate a 19 what I found is at the market ultimately we'll move higher doesn't happen in every case but there's a good percentage of there to satisfy these price projections but nevertheless, I have a breakout at 19 I would take 19 which is the breakout and I would add 6 to it and come up with a price objective of 25 so 25 would be my price objective up here you've taken something as simple as trendlines something you've never probably thought could could mean anything more than just something that to make you give me a self-gratification when you draw drew it and taking it and create it into an indicator that'll give you price objectives and I found that to be you know I first something that that was it was accidental but as they saw it and we look at this process more and more I found that not only did this occurs but a lot of times price gaps say for example the previous day prior to this, day did not exist prices would gap above the trend line and just go immediately to higher prices that was something that I thought that it was unclear to me before I could never a comfort for gaps and it took on a significance now what you've got here is the approach you can reverse this is called a PD supply line we could do it an uptrend and call a TD demand line but let me just tell you real quickly I'll say for example this price here were 23 you know 24 let's make it 24 this price here we're 22 on that particular point here and here now as you can see a period of others let's make this 25 25 and 22 a period of three days between these two points they have transpired so what I would do mathematically I'd just take the difference between 25 and a difference between 20 25 and 22 and I, we get three now three days and occurred so you can calculate yourself the rate of decline so you've had a period of three days you would divide three so what an effect what's happening this trendline is declining at a rate of 1 point per day as you can see here this confirms what I as I used as a price level here price 25 the next day it would be at 24 cause you're declining one point per day 23 22 that's your set right here which created the TD supply line now as you decline further for a period of two days what we looked at before was a deepest low which is right here you go immediately to the trend line above it straight up and then it's particular cases at 20 which confirms this you decline at one point per day now when you get to this the level you should have made this 18 probably you have two additional days here and when you break off to the upside you take the 20-14 you add 6 to it and this would be 24 but that's basically, that's the approach it's simple I'm open to questions afterwards after we finish this and hopefully you've got this. 

Thank you

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