. Usually atthe beginning of important market moves, the fundamentals do6 Chapter 1
not explain or support what the market seems to be doing. It is atthese critical times in the trend that these two approaches seemto differ the most. Usually they come back into sync at somepoint, but often too late for the trader to act.
One explanation for these seeming discrepancies is thatmarket price tends to lead the known fundamentals. Stated anotherway, market price acts as a leading indicator of the fundamentals or theconventional wisdom of the moment. While the known funda-mentals have already been discounted and are already “in the mar-ket,” prices are now reacting to the unknown fundamentals. Someof the most dramatic bull and bear markets in history have begunwith little or no perceived change in the fundamentals. By the timethose changes became known, the new trend was well underway.
After a while, the technician develops increased confidencein his or her ability to read the charts. The technician learns to becomfortable in a situation where market movement disagrees withthe so-called conventional wisdom. A technician begins to enjoybeing in the minority. He or she knows that eventually the reasonsfor market action will become common knowledge. It is just thatthe technician isn’t willing to wait for that added confirmation.
In accepting the premises of technical analysis, one can seewhy technicians believe their approach is superior to the funda-mentalists. If a trader had to choose only one of the twoapproaches to use, the choice would logically have to be the tech-nical. Because, by definition, the technical approach includes thefundamental. If the fundamentals are reflected in market price,then the study of those fundamentals becomes unnecessary.Chart reading becomes a shortcut form of fundamental analysis.The reverse, however, is not true. Fundamental analysis does notinclude a study of price action. It is possible to trade financialmarkets using just the technical approach. It is doubtful that any-one could trade off the fundamentals alone with no considerationof the technical side of the market.
ANALYSIS VERSUS TIMING
This last point is made clearer if the decision making process isbroken down into two separate stages—analysis and timing.Philosophy of Technical Analysis 7
 
Because of the high leverage factor in the futures markets, timingis especially crucial in that arena. It is quite possible to be correcton the general trend of the market and still lose money. Becausemargin requirements are so low in futures trading (usually lessthan 10%), a relatively small price move in the wrong directioncan force the trader out of the market with the resulting loss of allor most of that margin. In stock market trading, by contrast, atrader who finds him or herself on the wrong side of the marketcan simply decide to hold onto the stock, hoping that it will stagea comeback at some point.
Futures traders don’t have that luxury. A “buy and hold”strategy doesn’t apply to the futures arena. Both the technical andthe fundamental approach can be used in the first phase—theforecasting process. However, the question of timing, of deter-mining specific entry and exit points, is almost purely technical.Therefore, considering the steps the trader must go through beforemaking a market commitment, it can be seen that the correctapplication of technical principles becomes indispensable at somepoint in the process, even if fundamental analysis was applied inthe earlier stages of the decision. Timing is also important in indi-vidual stock selection and in the buying and selling of stock mar-ket sector and industry groups.
FLEXIBILITY AND ADAPTABILITYOF TECHNICAL ANALYSIS
One of the great strengths of technica] analysis is its adaptabilityto virtually any trading medium and time dimension. There is noarea of trading in either stocks or futures where these principlesdo not apply.
The chartist can easily follow as many markets as desired,which is generally not true of his or her fundamental counterpart.Because of the tremendous amount of data the latter must dealwith, most fundamentalists tend to specialize. The advantageshere should not be overlooked.
For one thing, markets go through active and dormantperiods, trending and nontrending stages. The technician can8 Chapter 1
 
concentrate his or her attention and resources in those marketsthat display strong trending tendencies and choose to ignore therest. As a result, the chartist can rotate his or her attention andcapital to take advantage of the rotational nature of the markets.At different times, certain markets become “hot” and experienceimportant trends. Usually, those trending periods are followed byquiet and relatively trendless market conditions, while anothermarket or group takes over. The technical trader is free to pick andchoose. The fundamentalist, however, who tends to specialize inonly one group, doesn’t have that kind of flexibility. Even if he orshe were free to switch groups, the fundamentalist would have amuch more difficult time doing so than would the chartist.
Another advantage the technician has is the “big picture.”By following all of the markets, he or she gets an excellent feel forwhat markets are doing in general, and avoids the “tunnel vision”that can result from following only one group of markets. Also,because so many of the markets have built-in economic relation-ships and react to similar economic factors, price action in onemarket or group may give valuable clues to the future direction ofanother market or group of markets.
TECHNICAL ANALYSISAPPLIED TO DIFFERENTTRADING MEDIUMS
The principles of chart analysis apply to both stocks and futures.Actually, technical analysis was first applied to the stock marketand later adapted to futures. With the introduction of stock indexfutures, the dividing line between these two areas is rapidly disap-pearing. International stock markets are also charted and analyzedaccording to technical principles. (See Figure 1.2.)
Financial futures, including interest rate markets and foreigncurrencies, have become enormously popular over the past decadeand have proven to be excellent subjects for chart analysis.
Technical principles play a role in options trading. Technicalforecasting can also be used to great advantage in the hedgingprocess.Philosophy of Technical Analysis 9
 
 
(TNA) Tokyo Nikkei Dow
 
Weekly Line Chart
Chart Support
 
 
 
 
a.
tbo Tey ees aes ese bose ;
 
Figure 1.2 The Japanese stock market charts very well as do most stockmarkets around the world.
TECHNICAL ANALYSIS APPLIEDTO DIFFERENT TIME DIMENSIONS
Another strength of the charting approach is its ability to handledifferent time dimensions. Whether the user is trading the intra-day tic-by-tic changes for day trading purposes or trend trading theintermediate trend, the same principles apply. A time dimensionoften overlooked is longer range technical forecasting. The opinionexpressed in some quarters that charting is useful only in theshort term is simply not true. It has been suggested by some thatfundamental analysis should be used for long term forecastingwith technical factors limited to short term timing. The fact isthat longer range forecasting, using weekly and monthly chartsgoing back several years, has proven to be an extremely usefulapplication of these techniques.10 Chapter 1
 
Once the technical principles discussed in this book are thor-oughly understood, they will provide the user with tremendous flex-ibility as to how they can be applied, both from the standpoint ofthe medium to be analyzed and the time dimension to be studied.
ECONOMIC FORECASTING
Technical analysis can play a role in economic forecasting. Forexample, the direction of commodity prices tells us somethingabout the direction of inflation. They also give us clues about thestrength or weakness of the economy. Rising commodity pricesgenerally hint at a stronger economy and rising inflationary pres-sure. Falling commodity prices usually warn that the economy isslowing along with inflation. The direction of interest rates is affect-ed by the trend of commodities. As a result, charts of commoditymarkets like gold and oil, along with Treasury Bonds, can tell us alot about the strength or weakness of the economy and inflation-ary expectations. The direction of the U.S. dollar and foreign cur-rency futures also provide early guidance about the strength orweakness of the respective global economies. Even more impressiveis the fact that trends in these futures markets usually show up longbefore they are reflected in traditional economic indicators that arereleased on a monthly or quarterly basis, and usually tell us whathas already happened. As their name implies, futures markets usu-ally give us insights into the future. The S&P 500 stock marketindex has long been counted as an official leading economic indi-cator. A book by one of the country’s top experts on the businesscycle, Leading Indicators for the 1990s (Moore), makes a compellingcase for the importance of commodity, bond, and stock trends aseconomic indicators. All three markets can be studied employingtechnical analysis. We'll have more to say on this subject inChapter 17, “The Link Between Stocks and Futures.”
TECHNICIAN OR CHARTIST?
There are several different titles applied to practitioners of thetechnical approach: technical analyst, chartist, market analyst,Philosophy of Technical Analysis 11
 
and visual analyst. Up until recently, they all meant pretty muchthe same thing. However, with increased specialization in thefield, it has become necessary to make some further distinctionsand define the terms a bit more carefully. Because virtually alltechnical analysis was based on the use of charts up until the lastdecade, the terms “technician” and “chartist” meant the samething. This is no longer necessarily true.
The broader area of technical analysis is being increas-ingly divided into two types of practitioners, the traditionalchartist and, for want of a better term, statistical technicians.Admittedly, there is a lot of overlap here and most technicianscombine both areas to some extent. As in the case of the tech-nician versus the fundamentalist, most seem to fall into one cat-egory or the other.
Whether or not the traditional chartist uses quantitativework to supplement his or her analysis, charts remain the prima-ry working tool. Everything else is secondary. Charting, of neces-sity, remains somewhat subjective. The success of the approachdepends, for the most part, on the skill of the individual chartist.The term “art charting” has been applied to this approach becausechart reading is largely an art.
By contrast, the statistical, or quantitative, analyst takesthese subjective principles, quantifies, tests, and optimizes themfor the purpose of developing mechanical trading systems. Thesesystems, or trading models, are then programmed into a com-puter that generates mechanical “buy” and “sell” signals. Thesesystems range from the simple to the very complex. However, theintent is to reduce or completely eliminate the subjective humanelement in trading, to make it more scientific. These statisticiansmay or may not use price charts in their work, but they are con-sidered technicians as long as their work is limited to the studyof market action.
Even computer technicians can be subdivided further intothose who favor mechanical systems, or the “black box”approach, and those who use computer technology to developbetter technical indicators. The latter group maintains controlover the interpretation of those indicators and also the decisionmaking process.12 Chapter 1
 
One way of distinguishing between the chartist and theStatistician is to say that all chartists are technicians, but not alltechnicians are chartists. Although these terms are used inter-changeably throughout this book, it should be remembered thatcharting represents only one area in the broader subject of tech-nical analysis.
A BRIEF COMPARISON OFTECHNICAL ANALYSIS INSTOCKS AND FUTURES
A question often asked is whether technical analysis as applied tofutures is the same as the stock market. The answer is both yes andno. The basic principles are the same, but there are some significantdifferences. The principles of technical analysis were first applied tostock market forecasting and only later adapted to futures. Most ofthe basic tools—bar charts, point and figure charts, price patterns,volume, trendlines, moving averages, and oscillators, for example—are used in both areas. Anyone who has learned these concepts ineither stocks or futures wouldn’t have too much trouble making theadjustment to the other side. However, there are some general areasof difference having more to do with the different nature of stocksand futures than with the actual tools themselves.
Pricing Structure
The pricing structure in futures is much more complicated than instocks. Each commodity is quoted in different units and incre-ments, Grain markets, for example, are quoted in cents per bushel,livestock markets in cents per pound, gold and silver in dollars perounce, and interest rates in basis points. The trader must learn thecontract details of each market: which exchange it is traded on,how each contract is quoted, what the minimum and maximumprice increments are, and what these price increments are worth.
Limited Life Span
Unlike stocks, futures contracts have expiration dates. A March1999 Treasury Bond contract, for example, expires in March ofPhilosophy of Technical Analysis 13
1999. The typical futures contract frades for about a year and ahalf before expiration. Therefore, at any one time, at least a halfdozen different contract months are trading in the same com-modity at the same time. The trader must know which contractsto trade and which ones to avoid. (This is explained later in thisbook.) This limited life feature causes some problems for longerrange price forecasting. It necessitates the continuing need forobtaining new charts once old contracts stop trading. The chart ofan expired contract isn’t of much use. New charts must beobtained for the newer contracts along with their own technicalindicators. This constant rotation makes the maintenance of anongoing chart library a good deal more difficult. For computerusers, it also entails greater time and expense by making it neces-sary to be constantly obtaining new historical data as old con-tracts expire.
Lower Margin Requirements
This is probably the most important difference between stocksand futures. All futures are traded on margin, which is usually lessthan 10% of the value of the contract. The result of these low mar-gin requirements is tremendous leverage. Relatively small pricemoves in either direction tend to become magnified in theirimpact on overall trading results. For this reason, it is possible tomake or lose large sums of money very quickly in futures. Becausea trader puts up only 10% of the value of the contract as margin,then a 10% move in either direction will either double the trad-er’s money or wipe it out. By magnifying the impact of evenminor market moves, the high leverage factor sometimes makesthe futures markets seem more volatile than they actually are.When someone says, for example, that he or she was “wiped out”in the futures market, remember that he or she only committed10% in the first place.
From the standpoint of technical analysis, the high leveragefactor makes timing in the futures markets much more critical thanit is in stocks. The correct timing of entry and exit points is crucialin futures trading and much more difficult and frustrating thanmarket analysis. Largely for this reason, technical trading skillsbecome indispensable to a successful futures trading program.14 Chapter 1
Time Frame Is Much Shorter
Because of the high leverage factor and the need for close moni-toring of market positions, the time horizon of the commoditytrader is much shorter of necessity. Stock market technicians tendto look more at the longer range picture and talk in time framesthat are beyond the concern of the average commodity trader.Stock technicians may talk about where the market will be inthree or six months. Futures traders want to know where priceswill be next week, tomorrow, or maybe even later this afternoon.This has necessitated the refinement of very short term timingtools. One example is the moving average. The most commonlywatched averages in stocks are 50 and 200 days. In commodities,most moving averages are under 40 days. A popular moving aver-age combination in futures, for example, is 4, 9, and 18 days.
Greater Reliance on Timing
Timing is everything in futures trading. Determining the correctdirection of the market only solves a portion of the trading prob-lem. If the timing of the entry point is off by a day, or sometimeseven minutes, it can mean the difference between a winner or aloser. It’s bad enough to be on the wrong side of the market andlose money. Being on the right side of the market and still losingmoney is one of the most frustrating and unnerving aspects offutures trading. It goes without saying that timing is almost pure-ly technical in nature, because the fundamentals rarely change ona day-to-day basis.
LESS RELIANCE ON MARKETAVERAGES AND INDICATORS
Stock market analysis is based heavily on the movement of broadmarket averages—such as the Dow Jones Industrial Average or theS&P 500. In addition, technical indicators that measure thestrength or weakness of the broader market—like the NYSEadvance-decline line or the new highs-new lows list—are heavilyemployed. While commodity markets can be tracked using mea-Philosophy of Technical Analysis 15
sures like the Commodity Research Bureau Futures Price Index,less emphasis is placed on the broader market approach.Commodity market analysis concentrates more on individualmarket action. That being the case, technical indicators that mea-sure broader commodity trends aren’t used much. With onlyabout 20 or so active commodity markets, there isn’t much need.
Specific Technical Tools
While most of the technical tools originally developed in thestock market have some application in commodity markets, theyare not used in the exact same way. For example, chart patterns infutures often tend not to form as fully as they do in stocks.
Futures traders rely more heavily on shorter term indica-tors that emphasize more precise trading signals. These points ofdifference and many others are discussed later in this book.
Finally, there is another area of major difference betweenstocks and futures. Technical analysis in stocks relies much moreheavily on the use of sentiment indicators and flow of funds analy-sis. Sentiment indicators monitor the performance of differentgroups such as odd lotters, mutual funds, and floor specialists.Enormous importance is placed on sentiment indicators thatmeasure the overall market bullishness and bearishness on thetheory that the majority opinion is usually wrong. Flow of fundsanalysis refers to the cash position of different groups, such asmutual funds or large institutional accounts. The thinking here isthat the larger the cash position, the more funds that are availablefor stock purchases.
Technical analysis in the futures markets is a much purer formof price analysis, While contrary opinion theory is also used tosome extent, much more emphasis is placed on basic trend analy-sis and the application of traditional technical indicators.
SOME CRITICISMS OF THETECHNICAL APPROACH
A few questions generally crop up in any discussion of the tech-nical approach. One of these concerns is the self-fulfilling prophe-16 Chapter 7
 
cy. Another is the question of whether or not past price data canreally be used to forecast future price direction. The critic usuallysays something like: “Charts tell us where the market has been,but can’t tell us where it is going.” For the moment, we’ll putaside the obvious answer that a chart won’t tell you anything ifyou don’t know how to read it. The Random Walk Theory ques-tions whether prices trend at all and doubts that any forecastingtechnique can beat a simple buy and hold strategy. These questionsdeserve a response.
The Self-Fulfilling Prophecy
The question of whether there is a self-fulfilling prophecy at workseems to bother most people because it is raised so often. It is cer-tainly a valid concern, but of much less importance than mostpeople realize. Perhaps the best way to address this question is toquote from a text that discusses some of the disadvantages ofusing chart patterns:
a. The use of most chart patterns has been widely publicized inthe last several years. Many traders are quite familiar withthese patterns and often act on them in concert. This createsa “self-fulfilling prophecy,” as waves of buying or selling arecreated in response to “bullish” or “bearish” patterns. . .
b. Chart patterns are almost completely subjective. No studyhas yet succeeded in mathematically quantifying any ofthem. They are literally in the mind of the beholder....(Teweles et al.)
These two criticisms contradict one another and the sec-ond point actually cancels out the first. If chart patterns are “com-pletely subjective” and “in the mind of the beholder,” then it ishard to imagine how everyone could see the same thing at thesame time, which is the basis of the self-fulfilling prophecy.Critics of charting can’t have it both ways. They can’t, on the onehand, criticize charting for being so objective and obvious thateveryone will act in the same way at the same time (thereby caus-ing the price pattern to be fulfilled), and then also criticize chart-ing for being too subjective.Philosophy of Technical Analysis 17
The truth of the matter is that charting is very subjective.Chart reading is an art. (Possibly the word “skill” would be moreto the point.) Chart patterns are seldom so clear that even experi-enced chartists always agree on their interpretation. There isalways an element of doubt and disagreement. As this bookdemonstrates, there are many different approaches to technicalanalysis that often disagree with one another.
Even if most technicians did agree on a market forecast,they would not all necessarily enter the market at the same timeand in the same way. Some would try to anticipate the chart sig-nal and enter the market early. Others would buy the “breakout”from a given pattern or indicator. Still others would wait for thepullback after the breakout before taking action. Some traders areaggressive; others are conservative. Some use stops to enter themarket, while others like to use market orders or resting limitorders. Some are trading for the long pull, while others are daytrading. Therefore, the possibility of all technicians acting at thesame time and in the same way is actually quite remote.
Even if the self-fulfilling prophecy were of major concern,it would probably be “self-correcting” in nature. In other words,traders would rely heavily on charts until their concerted actionsstarted to affect or distort the markets. Once traders realized thiswas happening, they would either stop using the charts or adjusttheir trading tactics. For example, they would either try to actbefore the crowd or wait longer for greater confirmation. So, evenif the self-fulfilling prophecy did become a problem over the nearterm, it would tend to correct itself.
It must be kept in mind that bull and bear markets onlyoccur and are maintained when they are justified by the law ofsupply and demand. Technicians could not possibly cause a majormarket move just by the sheer power of their buying and selling.If this were the case, technicians would all become wealthy veryquickly.
Of much more concern than the chartists is the tremen-dous growth in the use of computerized technical trading systemsin the futures market. These systems are mainly trend-followingin nature, which means that they are all programmed to identifyand trade major trends. With the growth in professionally man-18 Chapter 7
aged money in the futures industry, and the proliferation of mul-timillion-dollar public and private funds, most of whichare using these technical systems, tremendous concentrations ofmoney are chasing only a handful of existing trends. Because theuniverse of futures markets is still quite small, the potential forthese systems distorting short term price action is growing.However, even in cases where distortions do occur, they are gen-erally short term in nature and do not cause major moves.
Here again, even the problem of concentrated sums ofmoney using technical systems is probably self-correcting. If all ofthe systems started doing the same thing at the same time, traderswould make adjustments by making their systems either more orless sensitive.
The self-fulfilling prophecy is generally listed as a criticismof charting. It might be more appropriate to label it as a compli-ment. After all, for any forecasting technique to become so popu-lar that it begins to influence events, it would have to be prettygood. We can only speculate as to why this concern is seldomtaised regarding the use of fundamental analysis.
Can the Past Be Used to Predict the Future?
Another question often raised concerns the validity of using pastprice data to predict the future. It is surprising how often critics ofthe technical approach bring up this point because every knownmethod of forecasting, from weather predicting to fundamentalanalysis, is based completely on the study of past data. Whatother kind of data is there to work with?
The field of statistics makes a distinction between descrip-tive statistics and inductive statistics. Descriptive statistics refers tothe graphical presentation of data, such as the price data on astandard bar chart. Inductive statistics refers to generalizations, pre-dictions, or extrapolations that are inferred from that data.Therefore, the price chart itself comes under the heading of thedescriptive, while the analysis technicians perform on that pricedata falls into the realm of the inductive.
As one statistical text puts it, “The first step in forecastingthe business or economic future consists, thus, of gathering obser-Philosophy of Technical Analysis 19
 
vations from the past.” (Freund and Williams) Chart analysis isjust another form of time series analysis, based on a study of thepast, which is exactly what is done in all forms of time seriesanalysis. The only type of data anyone has to go on is past data.We can only estimate the future by projecting past experiencesinto that future.
So it seems that the use of past price data to predict thefuture in technical analysis is grounded in sound statistical con-cepts. If anyone were to seriously question this aspect of techni-cal forecasting, he or she would have to also question the validi-ty of every other form of forecasting based on historical data,which includes all economic and fundamental analysis.
RANDOM WALK THEORY
The Random Walk Theory, developed and nurtured in the academ-ic community, claims that price changes are “serially indepen-dent” and that price history is not a reliable indicator of futureprice direction. In a nutshell, price movement is random andunpredictable. The theory is based on the efficient market hypothe-sis, which holds that prices fluctuate randomly about their intrin-sic value. It also holds that the best market strategy to followwould be a simple “buy and hold” strategy as opposed to anyattempt to “beat the market.”
While there seems little doubt that a certain amount ofrandomness or “noise” does exist in all markets, it’s just unrealis-tic to believe that all price movement is random. This may be oneof those areas where empirical observation and practical experi-ence prove more useful than sophisticated statistical techniques,which seem capable of proving anything the user has in mind orincapable of disproving anything. It might be useful to keep inmind that randomness can only be defined in the negative senseof an inability to uncover systematic patterns in price action. Thefact that many academics have not been able to discover the pres-ence of these patterns does not prove that they do not exist.
The academic debate as to whether markets trend is of lit-tle interest to the average market analyst or trader who is forced20 Chapter 1
 
to deal in the real world where market trends are clearly visible. Ifthe reader has any doubts on this point, a casual glance throughany chart book (randomly selected) will demonstrate the presenceof trends in a very graphic way. How do the “random walkers”explain the persistence of these trends if prices are serially inde-pendent, meaning that what happened yesterday, or last week,has no bearing on what may happen today or tomorrow? How dothey explain the profitable “real life” track records of many trend-following systems?
How, for example, would a buy and hold strategy fare inthe commodity futures markets where timing is so crucial? Wouldthose long positions be held during bear markets? How wouldtraders even know the difference between bull and bear markets ifprices are unpredictable and don’t trend? In fact, how could a bearmarket even exist in the first place because that would imply atrend? (See Figure 1.3.)
 
(GC1599) Gold,New York Cash
 
Daily Line Chart
 
 
 
 
on eT errr err TT vi PeerSR ee a ee eee ae ee ae
 
Figure 1.3 A “random walker” would have a tough time convincing aholder of gold bullion that there’s no real trend on this chart.Philosophy of Technical Analysis 21
 
It seems doubtful that statistical evidence will ever totallyprove or disprove the Random Walk Theory. However, the ideathat markets are random is totally rejected by the technical com-munity. If the markets were truly random, no forecasting tech-nique would work. Far from disproving the validity of the techni-cal approach, the efficient market hypothesis is very close to thetechnical premise that markets discount everything. The academics,however, feel that because markets quickly discount all informa-tion, there’s no way to take advantage of that information. Thebasis of technical forecasting, already touched upon, is thatimportant market information is discounted in the market pricelong before it becomes known. Without meaning to, the acade-mics have very eloquently stated the need for closely monitoringprice action and the futility of trying to profit from fundamentalinformation, at least over the short term.
Finally, it seems only fair to observe that any processappears random and unpredictable to those who do not under-stand the rules under which that process operates. An electrocar-diogram printout, for example, might appear like a lot of randomnoise to a layperson. But to a trained medical person, all those lit-tle blips make a lot of sense and are certainly not random. Theworking of the markets may appear random to those who havenot taken the time to study the rules of market behavior. The illu-sion of randomness gradually disappears as the skill in chart readingimproves. Hopefully, that is exactly what will happen as the read-er progresses through the various sections of this book.
There may even be hope for the academic world. A num-ber of leading American universities have begun to exploreBehavioral Finance which maintains that human psychology andsecurities pricing are intertwined. That, of course, is the primarybasis of technical analysis.
UNIVERSAL PRINCIPLES
When an earlier version of this book was published twelve yearsago, many of the technical timing tools that were explained wereused mainly in the futures markets. Over the past decade, howev-22 Chapter 7
er, these tools have been widely employed in analyzing stock mar-ket trends. The technical principles that are discussed in this bookcan be applied universally to all markets—even mutual funds.One additional feature of stock market trading that has gainedwide popularity in the past decade has been sector investing, pri-marily through index options and mutual funds. Later in thebook we'll show how to determine which sectors are hot andwhich are not by applying technical timing tools. 
INTRODUCTION
Charles Dow and his partner Edward Jones founded Dow Jones &Company in 1882. Most technicians and students of the marketsconcur that much of what we call technical analysis today has itsorigins in theories first proposed by Dow around the turn of thecentury. Dow published his ideas in a series of editorials he wrotefor the Wall Street Journal. Most technicians today recognize andassimilate Dow's basic ideas, whether or not they recognize thesource. Dow Theory still forms the cornerstone of the study oftechnical analysis, even in the face of today’s sophisticated com-puter technology, and the proliferation of newer and supposedlybetter technical indicators.
On July 3, 1884, Dow published the first stock market aver-age composed of the closing prices of eleven stocks: nine railroadcompanies and two manufacturing firms. Dow felt that theseeleven stocks provided a good indication of the economic healthof the country. In 1897, Dow determined that two separateindices would better represent that health, and created a 12 stockindustrial index and a 20 stock rail index. By 1928 the industrial
2324 Chapter 2
index had grown to include 30 stocks, the number at which itstands today. The editors of The Wall Street Journal have updatedthe list numerous times in the ensuing years, adding a utilityindex in 1929. In 1984, the year that marked the one hundredthanniversary of Dow’s first publication