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Unit 10: Technical Analysis

First, we will examine the seminal theory from which much of the substances of technical Notes
analysis have been developed – the Dow Theory – after which the key indicators viz., price and
volume relating to entire market and individual stock performance as shown in Table 10.3 will
be examined.
Table 10.3: Tools of Technical Analysis

Category Market Indicators Market and individual stock
indicators
Price indicators Dow Theory – Breadth of market Line, bar and point and figure
indicators charges
o Plurality Moving averages. Relative strength
o Market breadth index
o Advance –Declines
o New highs and new lows
o The most active list
o Confidence indicator
(Disparity index)
Volume indicators New York and American Exchange Resistance and support charts
volume Contrary Opinion Theories Price volume bar charts
o Short selling
o Odd Lot trading
Other indicators Mutual fund activity
Credit balance theory

Self Assessment

Fill in the blanks:

8. A …………..………….. network is a trading system in which a forecasting model is trained
to find desired output from past trading data.
9. Some …………..………….. feel that forecasting aggregates a more reliable, since individual
errors can be filtered out.

10.6 Dow Theory

The Dow Theory is one of the oldest and most famous technical tools. It was originated by
Charles Dow, who founded the Dow Jones company and was the editor of The Wall Street Journal.
Charles Dow passed away in 1902.
The Dow Theory was developed by W.P. Hamilton and Robert Rhea from the editorial written
by Dow during 1900-02. Numerous writers have altered, extended and in some cases abridged
the original Dow Theory. It is the basis for many other techniques used by technical analysts.

The Dow Theory is credited with having forecast the Great Crash of 1929. On October 23, 1929,
The Wall Street Journal published a still famous editorial “A Twin in the Tide” which correctly
stated that the bull market was then over and a bear market had started. The horrendous market
crash which followed the forecast drew much favourable attention to the Dow Theory. Greiner
and Whitecombe assert that “The Dow Theory provides a time-tested method of reading the
stock market barometer.”
There are many versions of this theory, but essentially it consists of three types of market
movements: the major market trend, which can often last a year or more; a secondary intermediate
trend, which can move against the primary trend for one to several months; and minor

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