Stock Charts for Beginners

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Stock Charts - DOW Theory
The previous post on stock charts for beginners was about the first 3 tenets of DOW theory as explained by the guys at informedtrades.com - this post is about the last 3 tenets.

Tenet 4 - The Averages Must Confirm Each Other
This means that any rise in the DOW Jones Industrial Average must be confirmed by a rise in the DOW Jones Transportation Average, the reasoning being that if manufacturing companies are making more goods and more profits then the companies in the Dow Jones Transportation Index should also be more profitable as they are shipping the goods - if there's a divergence in these two indices then this is a signal of pending change - if not then it confirms the trend. This tenet is not so relevant today as the US is now much more of a service based economy than a manufacturing based economy.

Tenet 5 Trends Must Be Confirmed by Volume
This is still very relevant today. If the change in price (up or down) is accompanied by large volume then it means lots of people are taking part

Tenent 6 Trends Exist Until Signals Prove Otherwise

"The trend is your friend until the bend at the end" Finding signals showing that a trend is coming to an end is very important and will be covered later.

According to Dow, trends exist despite "market noise". There may be moves against the trend but these are temporary and the trend should be followed until it becomes clear that it has ended. Determining that the trend has ended is of course the tricky part and technical analysts tend to disagree.

In the current context (May 2009) many people were expecting the markets to put in a bottom after the horrendous 45% slump, but people differed about just where that bottom in the markets was going to be. When the DOW reached around 6500 many people were calling for it to go a lot lower, down to 4000 ! But so far it hasn't done that, it has in fact rallied back to around 8500. Now of course we are in an uptrend but most people expect it to end and head back down, which probably explains why it conitnues to go up.

1702 was an important point on the NASDAQ, if the NASDAQ had fallen back through 1702 that would have been very bearish and a signal that the markets were headed back down, but as it turned out the Nasdaq didn't fall back through 1702 and so that is seen as being very bullish. Markets should therefore continue to head higher ! We shall see.

Technical analysis may seem arcane but investing online without some basic understanding of stock charts would be very foolish.




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