TA Project Dow Theory

TA Project Dow Theory21 Apr 2014Purvis Capital Intern ProgramBackgroundCharles Henry Dow, 1851 - 1902Founded The Wall Street Journal, 1889Invented Dow Jones Industrial Average, 1896Published his stock market analysis in WSJ Editorial, 1899-1902William P Hamilton 4th editor of WSJ, organized Dows writings and formulated them into Dow Theory, 1922-1929

Basic TenetsThe averages discount everythingThe three trendsThe primary trends last > 1 year, run for several yearsThe secondary trends last > 3 weeks, run for several months, retrace 1/3 to 2/3 of moveThe minor trends last bet 1 day to 2 weeksMajor trend phasesThe bull marketThe bear marketPrinciple of confirmationVolume goes with the trendLines may substitute for secondariesOnly closing prices are usedA trend should be assumed to continue in effect until such time as its reversal has been definitely signaled

(2) Primary Trend~3 years~6 years~5 years~1 yearsEach bar on chart represents 1 month

(2) Secondary Trend~3mths~6 years~5 years~1 yearsEach bar on chart represents 1 month~6mths~1mth~3mth~3mth~2mth~4mth~5mth~1mth~8mth

(2) Minor Trend~8mthsEach bar on chart represents 1 day~3days~4days~6days~4days~12days~4days~13daysPrimary uptrend resume?(3) The bull marketUsually divisible into 3 phases(1) AccumulationPicking up of shares from discouraged & distressed sellersBids raised gradually, selling diminishes(2) Fair steady advance(3) Boils with activitymum & pop investors are inall financial news are goodNew issues are brought out in increasing numbersRampant speculationsExtreme high volumePrice air pockets begins to appearCats and dogs stocks being whirled up but top grade issues refused to follow

(3) The bear marketUsually divisible into 3 phases(1) DistributionFar sighted investors unload at increasing paceTrading vol still high but tending to diminish on rallyPublic still active but getting frustrated(2) Panic phaseBuyers thin out, sellers more urgentDecline suddenly accelerates into almost vertical drop, climactic volMay have fairly long secondary recover or sideway movement before 3rd phase(3) Discouraged sellingThose who held on through panicThose who picked up while it look cheapDownward movement less rapidBetter grade stocks decline more graduallyCats and dogs issues may have already lost all previous bull advance in first 2 bear phases

(3) The bear market(1) Distribution(2a) Steep decline(2b) Recovery & sideway movement (lines)(3) Discouraged sellingMarket found bottomEach bar on chart represents 1 week

(3) The bull marketEach bar on chart represents 1 week(1) AccumulationBear market botton(2) Fair & steady advance(3) Boils with activityExtreme vol, but lower high

(4) Principles of confirmation local indexes

FTSE ST Oil & Gas Index

FTSE ST Real Estate Investment Trusts Index

STI

(4) Principles of confirmation Global Indexes

STI 30

HSI 30Nikkei 255FTSE 100DJI 30

Reversal PatternsHead & ShouldersRounding Top & BottomTrianglesRectanglesDouble Tops & BottomsThe Broadening formationRising/Falling WedgeFlagGaps XD gaps, common gap, breakaway gap, runaway gap, exhaustion gap, island reversal

Head & Shoulders

SHSSHSDBSKeppel LandSTIDont usually measure move for indexEach bar on chart represents 1 week

Rounding bottomsEach bar on chart represents 1 weekSHSFalse breakoutTriangles/Rectangles/Double Bottoms

Each bar on chart represents 1 weekSymmetrical triangleRectangleFalse breakoutExtreme volWatch for pattern mutationDouble bottoms, less activity on second bottomAscending Triangle failureEach bar on chart represents 1 day

Keppel landSTIAscending tri should breakout upwardsLower top = weakFailure on STI =Most issues are bearishfailureSHSDont usually measure on Index

Broadening PatternSTINoble GrpFlags

Sembcorp Industries

STIConclusionAverages (Index) gives overviewPatterns in individual stocks are most stocks behaving similarly?Form trading biasNothing is cast in stone failure/mutation of patternsIn tandem with current sentiments and fundamentals

AppendixHistory of Dowhttp://ww2.dowtheoryletters.com/dtlol.nsf/htmlmedia/body_the_history_of_the_dow_theory.html