DISPLACED MOVING AVERAGES & INTERMARKET ANALYSIS
President and CEO of Market Technologies Interviewed Live on AOL’s Sage MarketTalk
Monday, April 9, 2001
Sage Host is Brian P. Stetten (SageCalc) Chief Market Commentator of Sage Online, Inc.
Sage Host: Please welcome Louis Mendelsohn, president and chief executive officer (CEO) of Market Technologies. For more information, visit www.vantagepointsoftware.com.
Louis Mendelsohn:Thank you for inviting me to participate today.
SageCalc: Could you tell us about your book “Trend Forecasting with Technical Analysis”?
This book discusses the role of intermarket analysis in examining financial markets, and it discusses the need to look at a broader picture, in which traders look at related markets in an effort to help make more effective trend forecasts for the market that they are trading.
SageCalc: What is intermarket analysis?
Intermarket analysis looks at the relationships of markets to one another and how they influence each other. With the globalization of the world’s economies, the financial markets have become increasingly more interdependent. As a result, the narrow focus of technical analysis that has been the mainstay over the past several decades is really too limited in today’s markets.
SageCalc: Are we moving toward a unified interdependent global communications and trading network?
I think we are, but we’re not there yet. But obviously as we move in that direction, the markets will become ever more interconnected, and technical analysis will have to adapt in order to stay current with the market conditions.
SageCalc: Will this trend make markets more volatile?
I think it will. Absolutely.
SageCalc: As markets become interconnected, does the benefit of global investment diversification start to diminish?
I’m not sure that that would be diminished by the globalization of the financial markets, but I think that the important thing is that traders pay attention to related markets and broaden their scope of analysis. I’m not suggesting that the single market approach that traders are presently using, where they look at each market by itself, needs to be thrown out the window. Intermarket analysis simply augments the single market approach that traders are still using.
SageCalc: How do profittaker.com and your services seek to help the individual investor?
We track 25 financial markets, including the stock indices, interest rates, the energy complex, and foreign currencies. And for each of those markets, using a pattern recognition tool known as Neural Networks, our software examines ten related markets simultaneously, and makes short-term forecasts of the trend direction of each of those markets. The software allows individual traders to look at the markets that they are trading from an intermarket perspective, which is very difficult for individual traders to do visually by looking at charts and trying to find correlations between markets. But through the use of Neural Networks, we’re able to find the hidden patterns and relationships between the related markets, and that allows us to make effective trend forecasts for the short term.
SageCalc: What kind of technical data is your brand of analysis specifically looking at?
For each of the target markets that we’re making the forecasts on, we’re looking at, as I said before, ten related markets simultaneously, which includes the open, high, low, close, volume, and open interest on these related markets. The forecasts that we make are from one to four days in the future, and the accuracy of these forecasts is in the vicinity of 80 percent at this point in time.
SageCalc: Is this more geared toward trading individual equities or options on equity indices?
The software is geared primarily toward futures trading, for instance, the 30-year Treasury bonds, various stock indices such as the Dow Jones Industrial Average [$INDU], Standard & Poor’s 500 Index [$INX], as well as all of the major foreign currencies and all of the major energy markets.
SageCalc: Do you incorporate any type of fundamental analysis into your system at all?
Not at the present time. We are focusing our attention on the intermarket relationships between the financial markets, and we do this both with regard to domestic as well as international markets that might be affecting a particular market.
SageCalc: What is your take on the current state of our equity market?
Again, we look ahead just four days, so we’re not making long-term predictions. On the Nasdaq Composite Index [$COMPX], our forecasts were slightly positive within a two-day window, and negative over a four-day window. As well, we make daily predictions of the predicted high and low of each market, so that, for instance, on our report which was generated after the close on Friday, April 6, we had predicted a high today of 1,762.58 and a predicted low of 1,706.41. We do the same type of predictions on each of the markets that we track.
SageCalc: What is a displaced moving average?
Several of the forecasts that we make are forecasts of moving averages. I’ve been working with this particular technical indicator for many years. It has a number of positive characteristics, but its main limitation is that moving averages tend to lag behind the market. I’ve found that by using intermarket data, coupled with the forecasting capabilities of Neural Networks, we have been able to make forecasts of moving averages that are highly accurate. By doing so, moving average crossover approaches can be created, which utilize these forecasted moving averages. In this manner, we have been able to make moving averages a leading indicator, rather than a lagging indicator.
SageCalc: Did you develop your trading system independently?
I’ve been developing trading software for the financial markets since the 1970s. This particular program, called VantagePoint, really represents the efforts of both myself and staff members in my firm who have various skills in computer programming and mathematics.
SageCalc: Do your models catch the occasional divergence between the Nasdaq [$COMPX] and the Dow [$INDU] that we sometimes see?
Yes, they do, since we have trained the Neural Networks on each of these specific markets independently. There are occasions when our predictions for the Dow might, for instance, be positive, whereas those on the Nasdaq may be negative. As an example, our forecasts on the Dow were all positive today, whereas on the Nasdaq the indication was that it would be positive over the next two days with a potential negative tone to the market within a four-day window. Obviously, since we update our models each day, these forecasts will be refined this evening for use tomorrow in tomorrow’s trading.
SageCalc: Does your software require real time data fed by some external source?
It does require external data, but we are not making our forecasts on an intraday basis; we are looking day-to-day. So the only data that’s required is end-of-day data.
SageCalc: What kind of a track record does this software have?
As I mentioned previously, we compile very precise statistics on the predicted accuracy of the software. This is done primarily in conjunction with the continuing refinements that we make to the program. So the accuracy varies from one market to another. For instance, on the Nasdaq 100 Index [$NDX.X], the predicted accuracy of the trend direction over the next two days is 75.4 percent, while on other markets it may be higher or lower.
SageCalc: Do your programs look at the dollar versus the euro, and if so, what is the short-term outlook?
We don’t look at the euro compared to the dollar. The currencies that we examine are the Swiss franc, Deutsche mark, British pound, Canadian dollar, Australian dollar, the Japanese yen, and the U.S. dollar index itself.
SageCalc: Do you look at the Federal Reserve (Fed) funds futures market?
That is not one of the markets that we presently track.
SageCalc: Which fixed income related markets do you track?
We track the 30-year U.S. Treasury bond, the two-year, five-year and 10-year Treasury notes, and the eurodollar.
Sage Host: Thank you for joining us today, Mr. Mendelsohn. We appreciate your insights!
Thank you for allowing me to discuss our research and the opportunity to discuss the importance of intermarket analysis.
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