Tutorial 10

1)
The Dow Theory contends that stock prices move in waves. In addition, these waves may be
grouped into 3 categories based upon the period of the wave:

a. Major trends for long period (tides)

b. Intermediated trends (waves) – corrections from major trends
c. Short-run daily movements for short periods (ripples).

The major trend is most important to investors.

2)
Bull market
- Volume typically increases as price increases and decreases as price decreases,
- Reflecting that buyers (vs. sellers) are more aggressive and
- Sellers are not too panicky and thus generally unwilling to accept too low a selling price.

Bear market
- Volume typically increases as price decreases and decreases as price increases,
- Reflecting that sellers (vs. buyers) are more aggressive as they are concerned that if they don’t
accept prevailing bids from buyers, they not be able to obtain as high a price if they where to
sell at a later date.
- Buyers are very cautious and thus not willing to pay too high a price.

3)
Usually price indicators (e.g. A-D line and the RSI) will be moving in the same direction as the
price trend e.g. the market index.
- However, major turning points in the market are usually signally by a divergence in the
direction between the price indicator and the price trend itself.

At the end of a bull market,

- We can expect the A-D line to turn down while the market index can continue to trend
upwards. This is a sign of weakness as the price uptrend (i.e. the uptrend in the market index)
is not supported by most of the non-index stocks (i.e. a declining A-D line).

4) a)
The key differences are that ‘Point & Figure charts):
- does not have a time axis (unlike the Bar chart where every single day/week, etc. is a separate
column along the X-axis).
- will continue to plot every single change in prices as long as it is in the same trend; however
 to reverse the trend being plotted, the price change must meet at least the value of the reversal
spread (unlike the Bar chart where every single price done is captured by the chart).

The main objective of ‘Point & Figure’ charts are to allow the technical analyst to study only the
major trends of a stock price/index and ignore the noises i.e. those price changes that are too
small/insignificant to cause a change in trend in the plotting of the chart.

b)

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