, the Market TechniciansAssociation presented a Gorham-silver bowl to Dow Jones & Co.According to the MTA, the award recognized “the lasting contri-bution that Charles Dow made to the field of investment analy-sis. His index, the forerunner of what today is regarded as theleading barometer of stock market activity, remains a vital tool formarket technicians 80 years after his death.”
Unfortunately for us, Dow never wrote a book on his the-ory. Instead, he set down his ideas of stock market behavior in aseries of editorials that The Wall Street Journal published aroundthe turn of the century. In 1903, the year after Dow’s death, S.A.Nelson compiled these essays into a book entitled The ABC ofStock Speculation. In that work, Nelson first coined the term“Dow's Theory.” Richard Russell, who wrote the introduction to a1978 reprint, compared Dow’s contribution to stock market theo-ty with Freud’s contribution to psychiatry. In 1922, William PeterHamilton (Dow’s associate and successor at the Journal) catego-rized and published Dow’s tenets in a book entitled The StockMarket Barometer. Robert Rhea developed the theory even furtherin the Dow Theory (New York: Barron’s), published in 1932.
Dow applied his theoretical work to the stock market aver-ages that he created; namely the Industrials and the Rails.However, most of his analytical ideas apply equally well to allmarket averages. This chapter will describe the six basic tenets ofDow Theory and will discuss how these ideas fit into a modernstudy of technical analysis. We will discuss the ramifications ofthese ideas in the chapters that follow.
BASIC TENETS1. The Averages Discount Everything.
The sum and tendency of the transactions of the StockExchange represent the sum of all Wall Street’s knowl-Dow Theory 25
 
edge of the past, immediate and remote, applied to thediscounting of the future. There is no need to add to theaverages, as some statisticians do, elaborate compilationsof commodity price index numbers, bank clearings, fluc-tuations in exchange, volume of domestic and foreigntrades or anything else. Wall Street considers all thesethings (Hamilton, pp. 40-41).
Sound familiar? The idea that the markets reflect everypossible knowable factor that affects overall supply and demandis one of the basic premises of technical theory, as was mentionedin Chapter 1. The theory applies to market averages, as well as itdoes to individual markets, and even makes allowances for “actsof God.” While the markets cannot anticipate events such asearthquakes and various other natural calamities, they quicklydiscount such occurrences, and almost instantaneously assimilatetheir affects into the price action.
2. The Market Has Three Trends.
Before discussing how trends behave, we must clarify what Dowconsidered a trend. Dow defined an uptrend as a situation in whicheach successive rally closes higher than the previous rally high, andeach successive rally low also closes higher than the previous rallylow. In other words, an uptrend has a pattern of rising peaks andtroughs. The opposite situation, with successively lower peaks andtroughs, defines a downtrend. Dow’s definition has withstood thetest of time and still forms the cornerstone of trend analysis.
Dow believed that the laws of action and reaction apply tothe markets just as they do to the physical universe. He wrote,“Records of trading show that in many cases when a stock reach-es top it will have a moderate decline and then go back again tonear the highest figures. If after such a move, the price againrecedes, it is liable to decline some distance” (Nelson, page 43).
Dow considered a trend to have three parts, primary, sec-ondary, and minor, which he compared to the tide, waves, and rip-ples of the sea. The primary trend represents the tide, the sec-ondary or intermediate trend represents the waves that make upthe tide, and the minor trends behave like ripples on the waves.26 Chapter 2
 
An observer can determine the direction of the tide by not-ing the highest point on the beach reached by successive waves.If each successive wave reaches further inland than the precedingone, the tide is flowing in. When the high point of each succes-sive wave recedes, the tide has turned out and is ebbing. Unlikeactual ocean tides, which last a matter of hours, Dow conceivedof market tides as lasting for more than a year, and possibly forseveral years.
The secondary, or intermediate, trend represents correc-tions in the primary trend and usually lasts three weeks to threemonths. These intermediate corrections generally retrace betweenone-third and two-thirds of the previous trend movement andmost frequently about half, or 50%, of the previous move.
According to Dow, the minor (or near term) trend usuallylasts less than three weeks. This near term trend represents fluc-tuations in the intermediate trend. We will discuss trend conceptsin greater detail in Chapter 4, “Basic Concepts of Trends,” whereyou will see that we continue to use the same basic concepts andterminology today.
3. Major Trends Have Three Phases.
Dow focused his attention on primary or major trends, which hefelt usually take place in three distinct phases: an accumulationphase, a public participation phase, and a distribution phase. Theaccumulation phase represents informed buying by the mostastute investors. If the previous trend was down, then at thispoint these astute investors recognize that the market has assimi-lated all the so-called “bad” news. The public participation phase,where most technical trend-followers begin to participate, occurswhen prices begin to advance rapidly and business newsimproves. The distribution phase takes place when newspapersbegin to print increasingly bullish stories; when economic news isbetter than ever; and when speculative volume and public partic-ipation increase. During this last phase the same informedinvestors who began to “accumulate” near the bear market bot-tom (when no one else wanted to buy) begin to “distribute”before anyone else starts selling.Dow Theory 27
 
Students of Elliott Wave Theory will recognize this divi-sion of a major bull market into three distinct phases. R. N.Elliott elaborated upon Rhea’s work in Dow Theory, to recognizethat a bull market has three major, upward movements. InChapter 13, “Elliott Wave Theory,” we’ll show the close similari-ty between Dow’s three phases of a bull market and the five waveElliott sequence.
4. The Averages Must Confirm Each Other.
Dow, in referring to the Industrial and Rail Averages, meant thatno important bull or bear market signal could take place unlessboth averages gave the same signal, thus confirming each other.He felt that both averages must exceed a previous secondary peakto confirm the inception or continuation of a bull market. He didnot believe that the signals had to occur simultaneously, but rec-ognized that a shorter length of time between the two signals pro-vided stronger confirmation. When the two’ averages divergedfrom one another, Dow assumed that the prior trend was stillmaintained. (Elliott Wave Theory only requires that signals begenerated in a single average.) Chapter 6, “ContinuationPatterns,” will cover the key concepts of confirmation and diver-gence. (See Figures 2.1 and 2.2.)
5. Volume Must Confirm the Trend.
Dow recognized volume as a secondary but important factor inconfirming price signals. Simply stated, volume should expand orincrease in the direction of the major trend. In a major uptrend, vol-ume would then increase as prices move higher, and diminish asprices fall. In a downtrend, volume should increase as prices dropand diminish as they rally. Dow considered volume a secondaryindicator. He based his actual buy and sell signals entirely on clos-ing prices. In Chapter 7, “Volume and Open Interest,” we'll coverthe subject of volume and build on Dow’s ideas. Today's sophisti-cated volume indicators help determine whether volume isincreasing or falling off. Savvy traders then compare this infor-mation to price action to see if the two are confirming each other.28 Chapter 2
 
 
 
binere (*DWI X) Dow Industrials
 
Dow Theory at Work
Dow Transports
Dow industrials
 
 
 
 
(ei _ ee eeeTRE TGlpn Pretad vaing VradeBeation © Orage!
 
Figure 2.1 A long term view of the Dow Theory at work. For a majorbull trend to continue, both the Dow Industrials and the Dow Transportsmust advance together.
6. A Trend Is Assumed to Be in Effect UntilIt Gives Definite Signals That It HasReversed.
This tenet, which we touched upon in Chapter 1, forms much ofthe foundation of modern trend-following approaches. It relates aphysical law to market movement, which states that an object inmotion (in this case a trend) tends to continue in motion untilsome external force causes it to change direction. A number oftechnical tools are available to traders to assist in the difficult taskof spotting reversal signals, including the study of support andresistance levels, price patterns, trendlines, and moving averages.Some indicators can provide even earlier warning signals of loss ofmomentum. All of that not withstanding, the odds usually favorthat the existing trend will continue.Dow Theory 29
 
(DWI X) Dow Industrials
Dow Theory Confirmations
 
Dow Industrials
 
 
 
 
 
LT A SE ER
 
 
Figure 2.2 Examples of two Dow Theory confirmations. At the start of1997 (point 1), the Dow Transports confirmed the earlier breakout in theIndustrials. The following May (point 2), the Dow Industrials confirmed theearlier new high in the Transports. :
The most difficult task for a Dow theorist, or any trend-fol-lower for that matter, is being able to distinguish between a normalsecondary correction in an existing trend and the first leg of a newtrend in the opposite direction. Dow theorists often disagree as towhen the market gives an actual reversal signal. Figures 2.3a and2.3b show how this disagreement manifests itself.
Figures 2.3a and 2.3b illustrate two different market sce-narios. In Figure 2.3a, notice that the rally at point C is lowerthan the previous peak at A. Price then declines below point B.The presence of these two lower peaks and two lower troughsgives a clear-cut sell signal at the point where the low at B is bro-ken (point S). This reversal pattern is sometimes referred to as a“failure swing.”30 Chapter 2
 
  
Figure 2.3a Failure Swing. Figure 2.3b Nonfailure Swing. NoticeThe failure of the peak atC to _ that C exceeds A before falling below B.
overcome A, followed by the Some Dow theorists would see a “sell” sig-violation of the low at B, con- nal at S1, while others would need to see astitutes a “sell” signal at S. lower high at E before turning bearish at S2.
In Figure 2.3b, the rally top at C is higher than the previouspeak at A. Then price declines below point B. Some Dow theoristswould not consider the clear violation of support, at S1, to be abona fide sell signal. They would point out that only lower lowsexist in this case, but not Jower highs. They would prefer to see arally to point E which is lower than point C. Then they would lookfor another new low under point D. To them, S2 would representthe actual sell signal with two lower highs and two lower lows.
The reversal pattern shown in Figure 2.3b is referred to as a“nonfailure swing.” A failure swing (shown in Figure 2.3a) is amuch weaker pattern than the nonfailure swing in Figure 2.3b.Figures 2.4a and 2.4b show the same scenarios at a market bottom.
THE USE OF CLOSING PRICES ANDTHE PRESENCE OF LINES
Dow relied exclusively on closing prices. He believed that averageshad to close higher than a previous peak or lower than a previoustrough to have significance. Dow did not consider intraday pene-trations valid.Dow Theory 31
 
Figure 2.4a Failure Swing Figure 2.4b = Nonfailure SwingBottom. The “buy” signal takes place Bottom. “Buy” signals occur at pointswhen point B is exceeded (at B1). Bl or B2.
When traders speak of lines in the averages, they are refer-ring to horizontal patterns that sometimes occur on the charts.These sideways trading ranges usually play the role of correctivephases and are usually referred to as consolidations. In more mod-ern terms, we might refer to such lateral patterns as “rectangles.”
SOME CRITICISMS OFDOW THEORY
Dow Theory has done well over the years in identifying majorbull and bear markets, but has not escaped criticism. On average,Dow Theory misses 20 to 25% of a move before generating a sig-nal. Many traders consider this to be too late. A Dow Theory buysignal usually occurs in the second phase of an uptrend as pricepenetrates a previous intermediate peak. This is also, incidentally,about where most trend-following technical systems begin toidentify and participate in existing trends.
In response to this criticism, traders must remember thatDow never intended to anticipate trends; rather he sought to rec-ognize the emergence of major bull and bear markets and to cap-ture the large middle portion of important market moves.32 Chapter 2
 
Available records suggest that Dow’s Theory has performed thatfunction reasonably well. From 1920 to 1975, Dow Theory signalscaptured 68% of the moves in the Industrial and TransportationAverages and 67% of those in the S&P 500 Composite Index(Source: Barron’s). Those who criticize Dow Theory for failing tocatch actual market tops and bottoms lack a basic understandingof the trend-following philosophy.
STOCKS AS ECONOMICINDICATORS
Dow apparently never intended to use his theory to forecast thedirection of the stock market. He felt its real value was to use stockmarket direction as a barometric reading of general business con-ditions. We can only marvel at Dow’s vision and genius. In addi-tion to formulating a great deal of today’s price forecastingmethodology, he was among the first to recognize the usefulnessof stock market averages as a leading economic indicator.
DOW THEORY APPLIED TOFUTURES TRADING
Dow’s work considered the behavior of stock averages. Whilemost of that original work has significant application to com-modity futures, there are some important distinctions betweenstock and futures trading. For one thing, Dow assumed that mostinvestors follow only the major trends and would use intermedi-ate corrections for timing purposes only. Dow considered theminor or near term trends to be unimportant. Obviously, this isnot the case in futures trading in which most traders who followtrends trade the intermediate instead of the major trend. Thesetraders must pay a great deal of attention to minor swings fortiming purposes. If a futures trader expected an intermediateuptrend to last for a couple of months, he or she would look forshort term dips to signal purchases. In an intermediate down-trend, the trader would use minor bounces to signal short sales.The minor trend, therefore, becomes extremely important infutures trading.Dow Theory 33
 
NEW WAYS TO TRADE THEDOW AVERAGES
For the first 100 years of its existence, the Dow Jones IndustrialAverage could only be used as a market indicator. That all changedon October 6, 1997 when futures and options began trading onDow’s venerable average for the first time. The Chicago Board ofTrade launched a futures contract on the Dow Jones IndustrialAverage, while options on the Dow (symbol: DjX) started trading atthe Chicago Board Options Exchange. In addition, options were alsolaunched on the Dow Jones Transportation Average (symbol: DJTA)and the Dow Jones Utility Index (symbol: DJUA). In January 1998, theAmerican Stock Exchange started trading the Diamonds Trust, a unitinvestment trust that mimics the 30 Dow industrials. In addition, twomutual funds were offered based on the 30 Dow benchmark. Mr.Dow would probably be happy to know that, a century after theircreation, it would now be possible to trade his Dow averages, andactually put his Dow Theory into practice.
   
                                      
CONCLUSION
This chapter presented a relatively quick review of the moreimportant aspects of the Dow Theory. It will become clear, as youcontinue through this book, that an understanding and apprecia-tion of Dow Theory provides a solid foundation for any study oftechnical analysis. Much of what is discussed in the followingchapters represents some adaptation of Dow’s original theory. Thestandard definition of a trend, the classification of a trend intothree categories and phases, the principles of confirmation anddivergence, the interpretation of volume, and the use of percent-age retracements (to name a few), all derive, in one way or anoth-er, from Dow Theory.
In addition to the sources already cited in this chapter, anexcellent review of the principles of Dow Theory can be found inTechnical Analysis of Stock Trends (Edwards & Magee). 
Chart Constructioncee eguenemgoren
 
INTRODUCTION
This chapter is primarily intended for those readers who are unfa-miliar with bar chart construction. We’ll begin by discussing thedifferent types of charts available and then turn our focus to themost commonly used chart—the daily bar chart. We'll look at howthe price data is read and plotted on the chart. Volume and openinterest are also included in addition to price. We’ll then look atother variations of the bar chart, including longer range weekly andmonthly charts. Once that has been completed, we’ll be ready tostart looking at some of the analytical tools applied to that chartin the following chapter. Those readers already familiar with thecharts themselves might find this chapter too basic. Feel free tomove on to the next chapter.
3536 Chapter 3
 
TYPES OF CHARTS AVAILABLE
The daily bar chart has already been acknowledged as the mostwidely used type of chart in technical analysis. There are, how-ever, other types of charts also used by technicians, such as linecharts, point and figure charts, and more recently, candlesticks.Figure 3.1 shows a standard daily bar chart. It’s called a bar chartbecause each day’s range is represented by a vertical bar. The barchart shows the open, high, low, and closing prices. The tic to theright of the vertical bar is the closing price. The opening price isthe tic to the left of the bar.
Figure 3.2 shows what the same market looks like on a linechart. In the line chart, only the closing price is plotted for eachsuccessive day. Many chartists believe that because the closingprice is the most critical price of the trading day, a line (or close-only) chart is a more valid measure of price activity.
07/15/97 (INTC) Intel Corp ” "92/27/98
'|
 
\ / il Daily Bar Chartq \ i i hhIt'‘yl\ yl
98 Feb,. WAZ 1 Open Pred isang TradeStation © Omega Research, inc 1957
 
|i I vh
 
 
Figure 3.1 A daily bar chart of Intel. Each vertical bar represents oneday’s action.Chart Construction 37
 
75/97 NTE) Intel Corp : a ee
Daily Line Chart
|
S784
. Fe~ = “7557 pr Parte aang Tradetiion © Grae Renee, ine. O87
 
 
 
Figure 3.2 A line chart of Intel. This type of chart produces a solid lineby connecting the successive closing prices.
A third type of chart, the point and figure chart, is shownin Figure 3.3. Notice here that the point and figure chart showsthe same price action but in a more compressed format. Noticethe alternating column of x’s and o’s. The x columns show risingprices and the o columns, declining prices. Buy and sell signals aremore precise and easier to spot on the point and figure chart thanon the bar chart. This type of chart also has a lot more flexibility.Chapter 11 covers point and figure charts.
CANDLESTICKS
Candlestick charts are the Japanese version of bar charting andhave become very popular in recent years among westernchartists. The Japanese candlestick records the same four prices asthe traditional bar chart—the open, the close, the high, and the38 Chapter 3
 
owi7i97 ~ (INTE) Intel Corp "926/98
Hoo
 
Point & Figure Chart
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
‘926 1010 toe 1131411424 2s 1216 1998109om Pred ug TraaaStaon © Omg Research i007
 
Figure 3.3 A point and figure chart of Intel. Notice the alternating columnsof x’s and o’s. The x column shows rising prices. The o column shows fallingprices. Buy and sell signals are more precise on this type of chart.
low. The visual presentation differs however. On the candlestickchart, a thin line (called the shadow) shows the day’s price rangefrom the high to the low. A wider portion of the bar (called thereal body) measures the distance between the open and the close.If the close is higher than the open, the real body is white (posi-tive). If the close is lower than the open, the real body is black(negative). (See Figure 3.4.)
The key to candlestick charts is the relationship betweenthe open and the close. Possibly because of the growing popular-ity of candlesticks, western chartists now pay a lot more attentionto the opening tic on their bar charts. You can do everything witha candlestick chart that you can do with a bar chart. In otherwords, all the technical tools and indicators we’ll be showing youfor the bar chart can also be used on candlesticks. We'll show youa bit later in the chapter how to construct bar charts for weeklyChart Construction 39
 
(INTC) intel Corp _ 01/29/98}
 
Daily Candlestick Chart
 
Figure 3.4 A candlestick chart of Intel. The color of the candlestick isdetermined by the relationship between the open and the close. White can-dlesticks are positive, while black candlesticks are negative.
and monthly periods. You can do the same with candlesticks.Chapter 12, “Japanese Candlesticks,” provides a more thoroughexplanation of candlestick charting.
ARITHMETIC VERSUSLOGARITHMIC SCALE
Charts can be plotted using arithmetic or logarithmic price scales.For some types of analysis, particularly for very long range trendanalysis, there may be some advantage to using logarithmiccharts. (See Figures 3.5 and 3.6.) Figure 3.5 shows what the differ-ent scales would look like. On the arithmetic scale, the verticalprice scale shows an equal distance for each price unit of change.Notice in this example that each point on the arithmetic scale isequidistant. On the log scale, however, note that the percentage40 Chapter 3
 
increases get smaller as the price
Arithmetic Logarithmic scale increases. The distance from10 points 1 to 2 is the same as the dis-tance from points 5 to 10 becausethey both represent the same dou-bling in price. For example, a movefrom 5 to 10 on an arithmetic scale4 would be the same distance as amove from 50 to 55, even though3 the former represents a doubling inprice, while the latter is a priceincrease of only 10%. Prices plottedon ratio or log scales show equal dis-tances for similar percentage moves.For example, a move from 10 to 20(a 100% increase) would be the- same distance on a log chart as aFigure 3.5 A comparison of move from 20 to 40 or 40 to 80.an arithmetic and logarithmic — M4any stock market chart servicesscale. Notice {ne equal ele he use log charts, whereas futures chartscale shows p orcentace chan ses services use arithmetic. Charting(right scale). software packages allow both types
of scaling, as shown in Figure 3.6.
oO98765
 
CONSTRUCTION OF THE DAILYBAR CHART
The construction of the daily bar chart is extremely simple. Thebar chart is both a price and a time chart. The vertical axis (the yaxis) shows a scale representing the price of the contract. The hor-izontal axis (the x axis) records the passage of time. Dates aremarked along the bottom of the the chart. All the user has to do isplot a vertical bar in the appropriate day from the day's high to theday’s low (called the range). Place a horizontal tic to the right ofthe vertical bar identifying the daily closing price. (See Figure 3.7.)
The reason for placing the tic to the right of the bar is todistinguish it from the opening price, which chartists record toChart Construction 41
Arithmetic Scaling
|f
I
i y|sol
we
3 8485S
 
 
Figure 3.6 Longer view of Intel using two different price scales. The chartto the left shows the traditional arithmetic scale. The chart on the rightshows a logarithmic scale. Notice that the three year up trendline worked bet-ter on the log chart.
the left of the bar. Once that day’s activity has been plotted, theuser moves one day to the right to plot the next day’s action. Mostchart services use five day weeks. Weekends are not shown on thechart. Whenever an exchange is closed during the trading week,that day’s space is left blank. The bars along the bottom of thechart measure volume. (See Figure 3.7.)
VOLUME
Another piece of important information should be included onthe bar chart—volume. Volume represents the total amount oftrading activity in that market for that day. It is the total numberof futures contracts traded during the day or the number of com-mon stock shares that change hands on a given day in the stockmarket. The volume is recorded by a vertical bar at the bottom ofthe chart under that day’s price bar. A higher volume bar means42 Chapter 3
 
 
fo7e7 ~ "TINTC) Intet Corp oo 02/03/98ae ae a . @
18s
Daily Volume Bars'-3900000
tht y ult, vuaulll itn
se “Te tng Yarn oes 1091
 
 
Figure 3.7 A closer look at the Intel daily bar chart. Each bar measuresthe day's price range. The opening price is marked by the small tic to the leftof each bar. The closing tic is to the right. The bars along the bottom mea-sure each day’s volume.
the volume was heavier for that day. A smaller bar representslighter volume. A vertical scale along the bottom of the chart isprovided to help plot the data, as shown in Figure 3.7.
FUTURES OPEN INTEREST
Open interest is the total number of outstanding futures contractsthat are held by market participants at the end of the day. Openinterest is the number of outstanding contracts held by the longs orthe shorts, not the total of both. Remember, because we're dealingwith futures contracts, for every long there must also be a short.Therefore, we only have to know the totals on one side. Open inter-est is marked on the chart with a solid line along the bottom, usu-ally just above the volume but below the price. (See Figure 3.8.)Chart Construction 43
 
os2397 ~~" (FRO6Q8) Treasury Bonds 06/98
 
Line Chart
 
Open Interest
Volume800000,
Hii will hy bul il ‘i -
 
 
is + in i te Sc eth ce!
 
Figure 3.8 A daily line chart of a Treasury Bond futures contract. Thevertical bars along the bottom measure the total daily volume. The solid linealong the middle represents the total outstanding open interest for theTreasury Bond futures market.
Total Versus Individual Volume and OpenInterest Numbers in Futures
Futures chart services, along with most futures technicians, useonly the total volume and open interest figures. Although figuresare available for each individual delivery month, the total figuresfor each commodity market are the ones that are used for fore-casting purposes. There is a good reason for this.
In the early stages of a futures contract's life, volume andopen interest are usually quite small. The figures build up as thecontract reaches maturity. In the last couple of months beforeexpiration, however, the numbers begin to drop again.Obviously, traders have to liquidate open positions as the con-44 Chapter 3
 
tract approaches expiration. Therefore, the increase in the num-bers in the first few months of life and the decline near the endof trading have nothing to do with market direction and are justa function of the limited life feature of a commodity futures con-tract. To provide the necessary continuity in volume and openinterest numbers, and to give them forecasting value, the totalnumbers are generally used. (Stock charts plot total volume fig-ures, but do not include open interest.)
Volume and Open Interest Reported a DayLate in Futures
Futures volume and open interest numbers are reported a daylate. Therefore, the chartist must be content with a day’s lag inobtaining and interpreting the figures. The numbers are usual-ly reported during the following day’s trading hours, but toolate for publication in the day’s financial newspapers. Estimatedvolume figures are available, however, after the markets closeand are included in the following morning’s paper. Estimatedvolume numbers are just that, but they do at least give thefutures technician some idea of whether trading activity washeavier or lighter the previous day. In the morning paper,therefore, what the reader gets is the last day’s futures pricesalong with an estimated volume figure. Official volume andopen interest numbers, however, are given for the day before.Stock chartists don’t have that problem. Volume totals forstocks are immediately available.
The Value of Individual Volume and OpenInterest Numbers in Futures
The individual open interest numbers in futures do provide valu-able information. They tell us which contracts are the most liquidfor trading purposes. As a general rule, trading activity should be lim-ited to those delivery months with the highest open interest. Monthswith low open interest numbers should be avoided. As the termimplies, higher open interest means that there is more interest incertain delivery months.Chart Construction 45
 
WEEKLY AND MONTHLYBAR CHARTS
We've focused so far on the daily bar chart. However, be awarethat a bar chart can be constructed for any time period. The intra-day bar chart measures the high, low, and last prices for periods asshort as five minutes. The average daily bar chart covers from sixto nine months of price action. For longer range trend analysis,however, weekly and monthly bar charts must be used. The valueof using these longer range charts is covered in Chapter 8. But themethod of constructing and updating the charts is essentially thesame. (See Figures 3.9 and 3.10.)
On the weekly chart, one bar represents the price activityfor the entire week. On the monthly chart, each bar shows the
06/05/92 oo (UDX) Us Dollar index
 
Weekly Bar Chart
yi
a vce comme iwos ni ton[Yo 16pm Poe ne Tae ion @ Oe Reet 1557
 
Figure 3.9 A weekly bar chart of the U.S. Dollar Index. Each bar repre-sents one week’s price data. By compressing the price data, the weekly chartallows for chart analysis of longer range price trends, usually in the vicinityof five years.46 Chapter 3
 
baratie2 ("UDX) Us Dollar index|
 
| Monthly Bar Chart
(i|
4 fy ah Mhi My iy My i