TECHNICAL ANALYSIS

DOW THEORY
SIX BASIC TENETS
1. The Averages Discount Everything
Changes in the daily closing prices reflect the aggregate judgment and emotions of all stock market participants. It is assumed that this process discounts everything known and predictable.

DOW THEORY
SIX BASIC TENETS
2. The Market has Three Movements
Primary movement broad price movements described as either a bull (rising) or a bear (falling) market, may last from less than a year to many years Secondary movement an important decline in a bull market or advance in a bear market; used to identify possible reversals Minor movements Lasts from a matter of hours up to as long as three weeks. It is important only in that it forms part of the primary or secondary moves

DOW THEORY SIX BASIC TENETS

3. Lines Indicate Movement
Price movement over 2-3 weeks or longer where price varies within approximately 5 percent (of mean average); indicates accumulation (stock moving intro strong hands; bullish) or distribution (stock moving into weak hands; bearish)

DOW THEORY
SIX BASIC TENETS
4. Volume Follows Trend
The normal relationship is for volume to expand on rallies and contract on declines. Otherwise, it is a warning that the prevailing trend may soon be reversed.

5. Price Action Determines Trend

Successively higher peaks and troughs are bullish; conversely, lower peaks/troughs are bearish.

DOW THEORY
SIX BASIC TENETS
6. The Averages Must Confirm
The sectoral averages must confirm.

The trend is my friend.

It is always assumed that a trend is in existence until a reversal is proved.

PRICE PATTERNS
Transition phases are almost invariably signaled by clearly definable price patterns or formations whose successful completion alerts the technician to the fact that a reversal in trend has taken place.
Trendlines and Channels Supports and resistances Size and depth Reversal patterns Consolidation patterns

PRICE PATTERNS
Heads and Shoulders/ Reverse Double Tops and Bottoms Broadening formations
Broadening formations with flattened bottom or top

Triangles
Symmetrical Right-angled triangles

MOVING AVERAGES
Moving Averages and Crossovers MA Envelopes plotted as fixed percentages above and below a MA Bollinger Bands Invented by George Bollinger; plotted as standard deviations above and below an average based on closing prices

MOMENTUM INDICATORS
Relative Strength Index and Trend Deviation Overbought / Oversold levels Divergences
Moving Average Convergence Divergence (MACD) an oscillator based on the division of one exponential moving average by another

Stochastics
Invented by George Lane: Attempts to measure the points in a rising trend in which the closing prices tend to cluster around the lows for the period in question

PRICE PATTERNS
Saucers and Rounding Tops Flags, Pennants and Wedges Gaps
Breakaway gaps Continuation or runaway gaps Exhaustion gaps

Island reversals