Basic Technical Analysis 1 Basic Technical Analysis Reference: Technical Analysis of the Financial Markets By John Murphy

What is Technical Analysis (TA)? Tenets of Technical Analysis Topics What is Technical Analysis (TA)? Tenets of Technical Analysis Dow Theory

What is Technical Analysis Technical Analysis – study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. --Philosophy of Technical Analysis by John Murphy Fundamental Analysis - study of economic, industry, and company conditions in an effort to determine the value of a company's stock. Fundamental analysis typically focuses on key statistics in a company's financial statements to determine if the stock price is correctly valued. --www.metastock.com

3 Tenets of Technical Analysis Market price discounts everything Prices move in trends History repeats itself All other factors in

Market price discounts everything Tenets of Technical Analysis Market price discounts everything Supply and demand causes the price movement Price action has considered all factors about the market/stock, both known and unknown All things happening in the market that affect the market price, is ultimately reflected in the market price

Prices move in trend Tenets of Technical Analysis Trend will continue unless the market proves otherwise

History Repeats Itself Tenets of Technical Analysis History Repeats Itself Chart patterns were identified to have worked in the past, they are assume to work as well in the future

Charles Dow American Journalist 1851 - 1902 Dow Theory Charles Dow American Journalist 1851 - 1902 Co founded Dow Jones & Company Founded the Wall Street Journal Published his ideas in a series of articles he wrote in the Wall Street Journal Published first stock market average composed of closing prices of 11 stocks Eventually became Dow Jones Industrial Index (DJIA) All other factors in

Basic Tenets of Dow Theory The averages discount everything The market has three trends Major trends has three phases The averages must confirm each other Volume must confirm the trend Trend is assumed to be in effect until it gives a definite signal that it has reversed All other factors in

Basic Tenets of Dow Theory The averages discount everything The market has three trends Major trends has three phases The averages must confirm each other Volume must confirm the trend Trend is assumed to be in effect until it gives a definite signal that it has reversed All other factors in

The Market Has Three Trends Dow Theory The Market Has Three Trends Primary Secondary/intermediate corrections in primary trend retraces between 1/3 to 2/3 of previous trend more frequently half (50%) of previous move Minor lasts less than 3 weeks All other factors in

Major Trends have Three Phases Dow Theory Major Trends have Three Phases Participation Distribution Accumulation All other factors in

Averages Must Confirm Each Other Dow Theory Averages Must Confirm Each Other All other factors in

Volume Must Confirm the Trend Dow Theory Volume Must Confirm the Trend Price Volume Down Trend Up Trend All other factors in

Volume Must Confirm the Trend Dow Theory Volume Must Confirm the Trend Price Volume Down Trend (bearish) Up Trend (bullish) Price Volume Trend 1 up bullish 2 down bearish 3 4 All other factors in

Volume Must Confirm the Trend Dow Theory Volume Must Confirm the Trend Price Volume Down Trend (bearish) Up Trend (bullish) Price Volume Trend 1 up bullish 2 down bearish 3 4 All other factors in

On average, Dow Theory misses 20 to 25% of a move before generating a signal. Many traders consider this to be too late. Traders must remember that Dow never intended to anticipate trends; rather he sought to recognize the emergence of major bull and bear markets to capture the large middle portion of important market moves. Technical Analysis of the Financial Markets By John Murphy

Dow never intended his theory to forecast the direction of the stock market. He felt its real value was to use the stock market direction as a barometric reading of general business conditions. In addition to formulating a great deal of today’s price forecasting methodology, he was among the first to recognize the usefulness of stock market averages as a leading economic indicator Technical Analysis of the Financial Markets By John Murphy

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