SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT (MCOM S3) - LECTURE 16: DOW THEORY (TRENDS) (MODULE 2)

This session deals with the two major trends discussed in the dow theory by Charles H Dow. The two major trends discussed in DOW THEORY are:-
BULLISH TREND
BEARISH TREND
Trends refer to the direction of movements. The share prices can rise, fall or remain the same. These are referred to as rising, falling, and flat trends. Share prices seldom moves in straight lines. The main or long trend is interrupted y short term counter movements known as secondary reactions. This result in zigzag movement.
The change in the direction of trend is referred to as trend reversal. A share that exhibits a rising trend may start to move narrowly or fall after sometime. This change in the direction of movement represents a trend reversal. Violation of the trend line shows the change in the direction of trend.
The terms bull and bear are thought to derive from the way in which each animal attacks its opponents. That is the bull will thrust its horn up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market.
BULLISH - Rise in prices.
BEARISH - Fall in prices.
During a bull market (upward moving market) there are three phases:-
First phase- Prices would advance with the revival of confidence in the future of business.
Second phase - Prices would advance due to the increase in corporate earnings.
Third phase - Prices advance due to inflation and speculation.
According to Dow Theory, the formation of higher bottoms and higher tops indicates a bullish trend.
The bear market (downward moving market) is also characterized by three phases:-
First phase- Prices begin to fall due to abandonment of hopes. Investors began to sell shares.
Second Phase - Companies starts reporting lower profits and lower dividend. This causes further fall in price due to increased selling pressure.
Third phase - Prices fall still further due to distress selling
A bearish market would be indicated by lower tops and lower bottoms.