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 .