Page 204 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 10: Technical Analysis

Notes
Figure 10.1: The Dow Jones Averages

Part A
900 Signal
Buy Signal
800
Dow Jones

700

Industrial average

200

Dow Jones
Confirmation
150
100

Transport Average

Time
Part B

Sell Signal
Part B

900

800 SELL SIGNAL
Signal Dow Jones
900 700

800 Industrial Average
Dow Jones
700 Signal

200 Dow Jones
Industrial Overage
150

Transport Average

200 0
Time
150 Dow Jones

Transport overage
10.6.1 Criticism of Dow Theory
0
Several criticisms are levelled against the Dow Theory.
Time
1. It is not a theory but an interpretation of known data. A theory should be able to explain
why a phenomenon occurs. No attempt was made by Dow or his followers to explain why
Figure 1: The Dow Jones Averages
the two averages should be able to forecast future stock prices.
2. It is not acceptable in its forecast. There was considerable lag between the actual turning
points and those indicated by the forecast.
3. It has poor predictive power. According to Rosenberg, the Dow Theory could not forecast
the bull market which had preceded the 1929 crash. It gave bearish indication in early

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