TA Project Dow

Theory
21 Apr 2014
Purvis Capital Intern Program

Background
Charles Henry Dow, 1851 - 1902
Founded The Wall Street Journal,
1889
Invented Dow Jones Industrial
Average, 1896
Published his stock market analysis
in WSJ Editorial, 1899-1902
William P Hamilton 4th editor of WSJ,
organized Dows writings and
formulated them into Dow Theory,

Basic Tenets

1. The averages discount everything

2. The three trends

The primary trends last > 1 year, run for several years
The secondary trends last > 3 weeks, run for several
months, retrace 1/3 to 2/3 of move
The minor trends last bet 1 day to 2 weeks

3. Major trend phases

4.
5.
6.
7.
8.

The bull market

The bear market

Principle of confirmation
Volume goes with the trend
Lines may substitute for secondaries
Only closing prices are used
A 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

Each bar on chart represents 1 month

~1 years

~5 years

(2) Secondary Trend

~2mth
~1mth

~4mth

~3mth

~8mth
~5mth
~1mth

~3mths

~3mth
~6mths
~6 years

Each bar on chart represents 1 month

~1 years

~5 years

(2) Minor Trend

~8mths
~3days
~12days

~4days
~4days
~6days
~4days

Each bar on chart represents 1 day

~13days

Primary uptrend resume?

(3) The bull market

Usually divisible into 3 phases
(1) Accumulation
Picking up of shares from discouraged & distressed sellers
Bids raised gradually, selling diminishes

(2) Fair steady advance

(3) Boils with activity
mum & pop investors are in
all financial news are good
New issues are brought out in increasing numbers
Rampant speculations
Extreme high volume
Price air pockets begins to appear
Cats and dogs stocks being whirled up but top grade issues
refused to follow

(3) The bear market

Usually divisible into 3 phases
(1) Distribution
Far sighted investors unload at increasing pace
Trading vol still high but tending to diminish on rally
Public still active but getting frustrated

(2) Panic phase

Buyers thin out, sellers more urgent
Decline suddenly accelerates into almost vertical drop, climactic vol
May have fairly long secondary recover or sideway movement before 3 rd
phase

(3) Discouraged selling

Those who held on through panic
Those who picked up while it look cheap
Downward movement less rapid
Better grade stocks decline more gradually
Cats and dogs issues may have already lost all previous bull advance in
first 2 bear phases

(3) The bear market

(1) Distribution
(2b) Recovery & sideway movement (lines)

(3) Discouraged selling

(2a) Steep decline

Market found bottom

Each bar on chart represents 1 week

(3) The bull market

(3) Boils with activity

(2) Fair & steady advance

(1) Accumulation

Extreme vol, but lower high

Bear market botton

Each bar on chart represents 1 week

(4) Principles of confirmation local

indexes
FTSE ST Oil & Gas Index

TSE ST Real Estate Investment Trusts Index

STI

DJI 30

(4) Principles of confirmation Global

Indexes

FTSE 100

Nikkei 255

HSI 30

STI 30

Reversal Patterns

Head & Shoulders

Rounding Top & Bottom
Triangles
Rectangles
Double Tops & Bottoms
The Broadening formation
Rising/Falling Wedge
Flag
Gaps XD gaps, common gap, breakaway gap,
runaway gap, exhaustion gap, island reversal

Each bar on chart

represents 1 week

Head & Shoulders

DBS

H
Keppel Land

STI

Dont usually measure move for index

Rounding bottoms

H S
S

False breakout

Each bar on chart represents 1 week

Triangles/Rectangles/Double Bottoms

Symmetrical triangle
False breakout

Watch for pattern mutation

Rectangle
Extreme vol

Double bottoms, less activity on second bottom

Each bar on chart represents 1 week

Ascending Triangle failure

Keppel land
Ascending tri should breakout upwards

failure

STI
Lower top = weak

S
Failure on STI =
Most issues are bearish

Each bar on chart represents 1 day

Dont usually
measure on
Index

S
H

Broadening Pattern
STI

Noble Grp

Flags
STI

Sembcorp Industries

Conclusion
Averages (Index) gives overview
Patterns in individual stocks are
most stocks behaving similarly?
Form trading bias
Nothing is cast in stone
failure/mutation of patterns
In tandem with current sentiments
and fundamentals

Appendix
History of Dow
http://ww2.dowtheoryletters.com/dtlol.n
sf/htmlmedia/body_the_history_of_the_d
ow_theory.html