Technical Analysis and Chart Interpretations. Ponsi Ed

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      Tennessee Coal, Iron, and Railroad Co.

      United States Leather Company

      United States Rubber Company

      By 1928, the Dow Jones Industrial Average had expanded to 30 companies. Over the years, dozens of names have been added and deleted, usually due to their performance and/or perceived relevance to the economy.

      Today, the U.S. economy is much broader than it was in 1896, and is considered a “service economy.” This means that actual services, such as repairing an automobile or cooking a meal, now make up a larger portion of the U.S. economy than manufacturing. Manufacturing can be done virtually anywhere due to automation, so it tends to occur where it can be accomplished inexpensively.

      As a result, the Dow Jones Industrial Average is sometimes perceived as a narrow stock index, and professionals tend to focus on broader indices like the Standard & Poor's 500. This is somewhat unfair, as the Dow Jones Industrial Average is now a misnomer; it is no longer squarely focused on industrial stocks. Over the years, the index has diversified into the health and pharmaceutical, consumer goods, energy, technology, financial, and retail sectors, making it more representative of the true economy.

The Dow Jones Transportation Average

      The Dow Jones Transportation Average is the descendant of the original rail-heavy index, making it older than the more prominent Dow Jones Industrial Average.

      All of the goods created in U.S. factories need transport by ship, highway, or rail to their ultimate destinations. Therefore, an index was created from the companies that provided these services. The performance of these companies was considered indicative of the overall economy.

      Is the Dow Jones Transportation Average still relevant? Despite the move away from manufacturing, transportation is still crucial to the U.S. economy.

      This is made clear by the boom in North American energy production. In the early twenty-first century, North American output of crude oil and natural gas soared, thanks in part to advances in technology. This energy boom led to a huge increase in demand for rail transportation services, which in turn drove the transportation index to new heights. Clearly, transportation remains a relevant economic factor in the twenty-first century.

      Like the Dow Jones Industrial Average, the Dow Jones Transportation Average has evolved with time. The original version predated the first powered flight, but today the index contains several airlines. In addition to railroads, which have merged into just a handful of names, the index also contains trucking, auto rental, and package delivery companies. This diversification allows the index to provide an accurate representation of the modern transportation sector.

Final Thoughts on the Cornerstone

      When Charles Dow created his stock indices, he had no idea how significant they would become. The Dow Jones Industrial Average is so prevalent that many refer to it as “the market.” Today, there are futures, options, exchange-traded funds, and a variety of other instruments that can be applied to Mr. Dow's indices.

      CHAPTER 4

      The Dow Theory

      A reporter and journalist, Charles Dow wrote editorials that were published in The Wall Street Journal in which he presented his theories on predictive analysis of the stock market. Dow never formally organized his theories into a cogent whole, and never wrote a book on his findings.

      The term “Dow Theory” was coined by author A.C. Nelson, who organized Dow's Wall Street Journal editorials into a book called The ABC of Stock Speculation around the time of Dow's death in 1902.

      William Peter Hamilton, who became publisher of the Journal after Dow's passing, based his 1922 book The Stock Market Barometer on Dow's tenets. In 1932, Robert Rhea further refined these concepts in his work, titled The Dow Theory: An Explanation of Its Development and an Attempt to Define Its Usefulness as an Aid to Speculation.

      Here are the basic concepts of Dow Theory:

      The Averages Discount Everything. All that is known or knowable about a stock is reflected in its price. Information is acted upon, and these actions are reflected in the price of the individual stocks, and by extension, the stock averages. If an event is widely anticipated, its occurrence is likely already reflected in the indices before it happens.

      Therefore, the markets don't necessarily reflect current circumstances; they often reflect anticipated future circumstances. This is why you'll sometimes see a stock market that seems completely disconnected from the current economy; at such times, the market isn't concerned with the state of the economy as it is today, but with its future condition. The notion of the price as a predictive mechanism, rather than a reflection of past or current events, is one of the lasting innovations of Dow's work.

      The Market Has Three Trends – Primary, Secondary, and Minor. In today's trading vernacular, perhaps a more concise way to express this would be “the market has three time frames.”

      The primary trend is measured in years. The terms “bull market” and “bear market” apply to the primary trend. A secondary trend is a counter-trend, corrective movement within the primary trend that normally lasts from three weeks to three months. A minor trend refers to short-term movement within the secondary trend, and normally lasts for less than three weeks.

      According to Dow Theory, the primary trend is of the greatest concern and presents the greatest opportunities. The secondary trend also creates trading opportunities, while the minor trend is usually of little consequence. The concept of trading across multiple time frames stems from this part of Dow's work.

      What is a trend? As mentioned in previous chapters, an uptrend consists of a series of higher highs and higher lows, while a downtrend consists of a series of lower highs and lower lows.

Trends Are Persistent

      Another tenet of Dow Theory that has stood the test of time is the concept of persistent trends. When the primary trend is in effect, a Dow Theory practitioner assumes that the trend will continue. This assumption stays in effect until clear reversal signals appear, such as the transportation and industrial averages together forming a series of lower lows.

      Because of the persistence of trends, traders should focus on trading in the same direction as the primary trend. They should avoid trading against it, with the possible exception of short-term trades.

      A trend has three phases – accumulation, public participation, and distribution.

      “Accumulation” refers to buying by those “in the know.” Often, this occurs after a market suffers sharp losses, and at a time when the general public has no desire to participate.

      After a market has been rising for some time, the public participation phase begins. This occurs as the general population recognizes the existence of a bull market and decides to begin buying.

      “Distribution” begins to occur as the bull market matures; this phase is often marked by wildly bullish sentiment, widespread public interest in the markets, and conspicuous representations of the bull market (on magazine covers, on television, and in movies).

Confirmation

      “Confirmation” is another lasting tenet of Dow's work. In reference to Dow Theory, confirmation specifically refers to the relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Average.

      In order to confirm a bull rally, both indices must exceed a previous major high point. An excellent СКАЧАТЬ