Saturday, February 19, 2011

Analysis Lesson




Six basic tenets of Dow Theory

  1. The market has three movements
    (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.
     

  2. Market trends have three phases
    Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).
     

  3. The stock market discounts all news
    Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.
     

  4. Stock market averages must confirm each other
    In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.
    Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.
     

  5. Trends are confirmed by volume
    Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.
     

  6. Trends exist until definitive signals prove that they have ended
    Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

 

34 comments:

  1. I really want to get into trading. Your blogs been very helpful! Thanks!

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  2. With this kind of info ill be on my way to riches in no time :)

    Supporting

    http://www.electricaddict.blogspot.com/

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  3. Not as complicated as it appears actually, thanks

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  4. intresting, following for more!

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  5. Good videos! I've always been interested in these kind of things. Hopefully someday, I'll make a living with stocks.

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  6. Wow, this is a lot of good information. I've read it twice and I don't think I grasp everything. Third times a charm.

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  7. helpful videos nice. more complicated than most might like hah

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  8. Something I might get into! thanks for sharing!

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  9. Well this clarifies alot for me. The Dow has always been something that has befuddled me, and I've always seen it as some weird semi-aware entity that somehow controls the mood of the planet. Keep up the great work!

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  10. Thanks for sharing this, it really helped me with analyzing the market data

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  11. This will be really helpful when I finally have enough to start trading.

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  12. thanks for the info, I don't trade!

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  13. great information! thanks for the lesson!

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  14. Thanks for the insightful entry

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  15. yay, analysis... loved that at school :)

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  16. quite an intresting post, will follow and keep updated ;)

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  17. This is very helpful, thank you so much. I've been dabbling in stocks recently and have been searching around on tips for investing. Great videos. :)

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  18. I have no clue what's going on, but I'll keep reading.

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  19. Thank you for more great analysis!

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  20. Very informative post. I've been working on understanding and spotting trends in the stock market now that the economy is turning around.

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  21. I couldnt agree more on point 3. nice dude.

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  22. Yeah, I've had to look at it twice today also LOL. Definitely going to be asking some questions later on when the subject matter gets deeper. Economics have always eluded me for some reason...

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  23. I remember studying this stuff at Business Admin. Very important

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  24. great stuff. not sure if you elaborated in an earlier post but might want to give a brief rundown of bear vs bull markets for the non-initiated

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  25. I wish I was more business inclined, this is somewhat hard to follow..

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  26. Yeah, economics made simply'd be good.

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  27. Excellent info on this, thanks a lot for sharing.
    There is nothing more unstable and risky than this type of investing, and these tips and tricks have really made me a little more confident in the whole investing idea.

    thanks for the great info.

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