Dow Theory & Gap Theory

Axioms of Stocks & Options (A2) Notebook 1: Dow Theory & Gap Theory

Dow Theory & Gap Theory

Dow Theory:

 ______Journalist  Started the publication named the ____ Street Journal  Dow Jones Industrials and Transportation averages arose from their investigative research into ______behaviour  ______Dow essentially hypothesised what became the foundation of modern technical analysis

Dow Theory Principles:

1. The _____ Discounts Everything 2. The Market Has _____ Trends 3. Trends Have Three _____ 4. The _____ Must Confirm Each Other 5. ______Must Confirm The Trend 6. A trend is in effect until it has given definite signals that it has ______

1. The Price Discounts Everything:

 All known information (fundamental) that can be known, is already reflected in the _____ price  Because everything known is priced into a stock price – all we have left to measure is market ______and human behaviour

Technical Analysts recognise the cognitive factors that impinge rational

behaviour

2. Three Trends of the Market:

1) P______2) I______3) M______

Axioms of Stocks & Options A2 2 Notebook 1: Dow Theory & Gap Theory

Primary Trend:

 ______term trend (Macro Trend)  __ year +

Secondary Trend:

 ______trend  3 - 9 ______ ______lines  Works with the ______trend

Minor Trend:

 ____ term trend  ______to a couple of weeks  Works with the ______trend

Three Trends of the Market:

 Primary: ____ of the ocean  Intermediate: _____  Minor: _____

Human sentiment defines the wave

3. Trends Have Three Phases

1. A______2. Public P______3. D______

Axioms of Stocks & Options A2 3 Notebook 1: Dow Theory & Gap Theory

Accumulation:

 Where educated investors begin ______their positions  Realise when a market move has exhausted and begin taking on ______positions  May seem market ______, rather they are market informed!  News and market sentiment is extremely ______

Public Participation:

 ______begins to pay attention after the market is established  They ______the market from Pivot Point to Pivot Point  When the ______move in  Act as the fuel of the ______ News begins to form a ______bias

Distribution:

 The news during a distribution phase is the most ______ When the most risk-averse/ uneducated investors begin ______ When the informed participants _____ their positions  The people who began the ______are now selling to the uneducated investors

Axioms of Stocks & Options A2 4 Notebook 1: Dow Theory & Gap Theory

What Does This Mean For You?

 Gives you a ______edge in the market  If you can _____ where the big boys are looking, you can look there too

4. Averages must confirm each another:

 Dow Jones ______Average  Dow Jones ______Average  Together they are a ______of the health of the US economy

Ideology:

 If industry is producing it, transportation must be ______it  If transportation slows down ______will also  Most ______ The least ______upon

5. Volume must confirm the trend:

 Volume represents the ______ When the majority jump on board we have a ______ If the majority are ______, we don’t have a strong trend  If the majority join in the same direction, the ______will confirm the trend

_____ represents the majority. When the majority jump on board we have a trend

Axioms of Stocks & Options A2 5 Notebook 1: Dow Theory & Gap Theory

6. A Trend is in effect:

 A trend is in effect until it has given ______signals that it has revered  Until evidence proves a ______trend reversal, we assume the current direction

Gap Theory:

 A gap is created when the closing price and opening price of two consecutive trading days does not ______

What Causes Gaps:

 Sudden change in ______value  After hours trading and _____  Security trading ex ______ ______gap from 24 hour trade  Low ______

Common Gap:

 Occurs ______ Fills ______(closes the gap)  ____ stock liquidity  The majority of gaps will ____ during the first 45 minutes of the day

Body & True Gaps:

 More times than not a gap will ____  For those that don’t we have ____ classifications

1. B____ Gap

2. T____ Gap

Axioms of Stocks & Options A2 6 Notebook 1: Dow Theory & Gap Theory

True Gap:

 When a Gap forms, it acts as ______and resistance until it “fills”  Gaps identify the phase of a trend through the ______in which they occur  Trade in the ______of the Gap (Window)  True Gaps are usually ______related  Usually occur in ______of 3 or 4

True Gap Classifications:

 B______Gap  R______Gap  E______Gap

Breakaway Gap:

 Originates at market ______and precedes an ensuing new trend  Often appears after a ______chart pattern has confirmed  Is found at ______Pivot Point highs and lows on a price chart  Widely recognised as the most ______gap because it kick starts new trends  The Breakaway Gap will occur on heavy ______supporting the move

Reversal Gap:

 Variation of the ______Gap  No ______warning (turn) is given before the Reversal Gap occurs  The security will usually hit a new price ______, then gap in the new direction  Usually after an ______announcement  Stronger then a ______Gap

Axioms of Stocks & Options A2 7 Notebook 1: Dow Theory & Gap Theory

Runaway Gap:

 Appears once a trend is ______and is in motion  Runaway Gaps personify a ______trend and lends confidence to trend continuation  Runaway Gaps often serve as a ______point of the current trend  We always trade in the direction of the ____

Exhaustion Gap:

 Occurs at the end of a trend signifying trend ______ Price will gap up similar to a ______Gap and attempt to move higher  Buyers will fail to show continued ______, indicating current price levels cannot be sustained

Island Reversal:

 Formed by an ______Gap followed by a ______Gap  Occurs at the _____ of a trend signifying complete trend exhaustion  If the Island Reversal occurs at a ______turning point then a large reversal is likely  Incredibly strong ______pattern

Axioms of Stocks & Options A2 8 Notebook 1: Dow Theory & Gap Theory

Answer Key:

Dow Theory:

 Investigative  Wall  Market  Charles

Dow Theory Principles:

 Price  Three  Phases  Averages  Volume  Reversed

The Price Discounts Everything:

 Current  Sentiment

Three Trends of the Market:

 Primary  Intermediate  Minor

Primary Trend:

 Long  1

Secondary Trend:

 Intermediate

Axioms of Stocks & Options A2 9 Notebook 1: Dow Theory & Gap Theory

 Weeks  Fan  Primary

Minor Trend:

 Short  Days  Intermediate

Three Trends of the Market:

 Primary: _____ of the ocean  Intermediate: _____  Minor: ______

3. Trends Have Three Phases:

 Accumulation  Participation  Distribution

Accumulation:

 Accumulating  Counter  Contrarian  Bearish

Public Participation:

 Public  Drive  Masses  Trend  Bullish

Distribution:

Axioms of Stocks & Options A2 10 Notebook 1: Dow Theory & Gap Theory

 Bullish  Buying  Exit  Accumulation

What Does This Mean For You?

 Competitive  Learn

4. Averages must confirm each another:

 Industrial  Transportation  Measurement  Delivering  Production  Disputed  Relied

5. Volume must confirm the trend:

 Majority  Trend  Unsure  Volume

6. Trend is in effect:

 Definite  Terminal

Gap Theory:

 Match

What Causes Gaps:

Axioms of Stocks & Options A2 11 Notebook 1: Dow Theory & Gap Theory

 Perceived  News  Dividend  Suspension  Liquidity

Common Gap:

 Regularly  Quickly  Low  Fill

Body & True Gaps:

 Fill  Two  Body  True

True Gap:

 Support  Location  Direction  Patterns

True Gap Classifications:

 Breakaway  Runaway  Exhaustion

Breakaway Gap:

 Reversals  Terminal

Axioms of Stocks & Options A2 12 Notebook 1: Dow Theory & Gap Theory

 Historical  Profitable  Volume

Reversal Gap:

 Breakaway  Reversal  Extreme  Earnings  Breakaway

Runaway Gap:

 Established  Healthy  Midway  Gap

Exhaustion Gap:

 Exhaustion  Runaway  Commitment

Island Reversal:

 Exhaustion, Breakaway  End  Historical  Reversal

Axioms of Stocks & Options A2 13 Notebook 1: Dow Theory & Gap Theory