Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
If you are at all interested in the who and how of Tom DeMark, Bloomberg Markets magazine has an in depth piece on the man. I’ve never sat down to study the methodology so I only have a 40,000 foot point of view understanding of his concepts but it definitely feeds off those magical Fibonacci levels. There were also some throw away lines about the growth of technical analysis which I found interesting – personally I believe as more people use these methods they self reinforce. Well worth a read for those so inclined – a few snippets:
- Since he started in the investment business in 1971, DeMark has advised some of the biggest names on Wall Street, men such as Paul Tudor Jones and Leon Cooperman. He’s a consultant to Steven Cohen, founder of SAC Capital Advisors LP, which manages $14 billion, and John Burbank, founder of $3.4 billion Passport Capital LLC. SAC and Passport each own a piece of DeMark’s company, Market Studies LLC.
- DeMark’s system for predicting where markets will move, divined from four decades of chart gazing, is based partly on the recondite mathematical relationships that devotees see in the design of the Parthenon in Athens and the Great Pyramid of Giza. Get DeMark’s followers talking, and their enthusiasm for his market calls is unbounded.
- DeMark, 65, is a member of a group of market forecasters who devote their days to poring over price charts, looking for recurring mathematical patterns. Most call themselves technical analysts, as opposed to those who rely on fundamentals like earnings and economic growth. DeMark says fundamentals do matter. He also believes that markets are governed by waves that crest and fall based on a sequence of numbers called the Fibonacci sequence and the closely related golden mean, or golden ratio.
- Fibonacci numbers appear in this infinite sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 …, where each number is the sum of the previous two.Divide one Fibonacci number by its predecessor, and the quotients will cluster around 1.618 — the golden mean, or so-called divine proportion. Technical analysts say that both can be used to predict a market’s direction, and some say they’re literally divine.
- Technical analysis is in the midst of a post-financial- crisis boomlet. Tyler Wood, marketing director at the New York- based Market Technicians Association, says there has been a 30 percent jump in new members in the past two years, pushing its rolls to 4,500 as of mid-October.
Of course there is the flip side…
- Traditional investors who look at fundamentals and managers of quantitative funds can barely hide their contempt for the technicians. “Comparing technical indicators to what we do is like comparing bush medicine to the research performed by drug companies,” says Matthew Beddall, chief investment officer at London-based Winton Capital Management Ltd., a quantitative hedge fund staffed by physics and math Ph.D.s. Technicians who, like DeMark, are believers in Fibonacci numbers and the golden mean are especially annoying to quants.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
