Dow Theory

In Dow Theory, the primary trend is the major trend of the market, which makes it the most
important one to determine. This is because the overriding trend is the one that affects the
movements in stock prices. The primary trend will also impact the secondary and minor trends
within the market.

This theory views the movement of market prices occurring in three categories:

 Primary movements
These are called bull and bear markets. Bull markets are where prices move in an
upward manner for several years. Bear markets , on the other hand, are where prices
move in a downward manner for several months or a few years.

 Secondary movements
These are up and down movements of stock prices that last for a few months and are
called corrections

 Daily movements
These are meaningless random daily fluctuations. These are generally ignored during
charting of indices.
 STOCK MARKET INDEX

A stock index or stock market index is a measurement of the value of a section

of the stock market. It is computed from the prices of selected stocks (typically a
weighted average). It is a tool used by investors and financial managers to describe
the market, and to compare the return on specific investments.

How is the stock market index calculated?

The index is computed with a 'Weighted Average Market Capitalization'. The

Market Capitalization is based on multiplying the stock price and the shares
outstanding. Each stocks weight is calculated by dividing the market capitalization
of each stock by the total market capitalization of S&P 500.

What do the numbers mean in the stock market?

A: For stocks, one point equals one shilling. So when you hear that a stock has lost
or gained X number of "points," this is the same as saying that the stock has lost or
gained X number of shillings. Although one point always equals one shillings, the
percentage value of one point movement can be different for two companies

Factors to consider in the construction of stock market index:

1. Sample size
The sample should be a statistically significant fraction of the population studied
because larger samples tend to produce more accurate indications about the
underlying population. If a sample is too large, it can be costly to compile.
2. Representatives
The sample should contain heterogeneous elements representing all segments of the
population.
3. Weighing
The various elements in the sample should be assigned weights that correspond to
investment opportunities in the population under study:

(i) A security’s weight in some in some index might be proportional to the total
market value of all the firm’s shares that are outstanding stated as a fraction on
the total market value of all the securities being traded in its market. Such
value-weighing of an index is done to reflect investment opportunities in
existence at any movement.

(ii) Equal weights could be used to represent the probability of selecting any given
security with random sampling (or equivalently, selecting stocks by throwing
un an aimed dart.). An equally weighed index represents a “no skill” or naïve
buy and hold investment strategy
(4) Convenient units
An index should be sated in units that are easy to understand and which facilitate
answering questions.

(5) Computation of the mean

Most security market indicators are calculated as some sort of arithmetic average.
The geometric average is an alternative computational procedure, it results in a
smaller but similar value that is less volatile than an arithmetic mean calculated
from the same sample of securities.

(6) Timing interval on which calculations of index are based.

(7) The prices to use for computation we close, mean, low, high.