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