Page 180 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 6: Technical Analysis

Notes
Figure 6.1: The Dow Jones Averages

Part A
900 Signal
Buy Signal

800
Dow Jones

700

Industrial average

200

Dow Jones
Confirmation
150
100

Transport Overage

Time
Part B

Sell Signal
Part B

900

SELL SIGNAL
800 Dow Jones
900 Signal
800 700
Dow Jones
Industrial Overage
Signal
700
Industrial Overage

200 Dow Jones
200 150
Dow Jones
150 Transport Overage
0
Transport overage
Time
0
The Dow Theory is built upon the assertion that measures of stock prices tend to move together.
Time
It employs two of the Dow Jones' averages.
Dow-Jones Transportation Average (DJTA)
1. Figure 1: The Dow Jones Averages
2. Dow-Jones Transportation Average (DJTA)

Bear market – If both the averages are rising

Bear market – If both the averages are falling
Uncertain – If one is rising and other is falling
Although Charles Dow believed in fundamental analysis, the Dow Theory has evolved into a
primarily technical approach to the stock market. It asserts that stock prices demonstrate patterns
over four to five years and these patterns are mirrored by indices of stock prices. The Dow
Theory employs two of the Dow Jones' averages, the industrial average and the transportation
average. The utility average is generally ignored.

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