Technical Analysis Explained, Fifth Edition: The Successful Investor's Guide to Spotting Investment Trends and Turning Points by Martin J. Pring

Author:Martin J. Pring [Pring, Martin J.]
Language: eng
Format: epub
ISBN: 9780071825177
Amazon: 0071825177
Publisher: McGraw-Hill Education
Published: 2014-01-08T05:00:00+00:00

Price: The Major Averages ● 433

small number of stocks in an average was convenience. Years ago, the aver ages

had to be laboriously calculated by hand. With the advent of the computer, the

inclusion of a more comprehensive sample became much easier.

One of the drawbacks of the method used in the construction of the

DJIA is that if a stock increases in price and is not split, its influence on the

average will become substantially greater, especially if many of the other Dow

stocks are growing and splitting at the same time. In spite of this and other

drawbacks, however, the Dow has, over the years, acted fairly con sistently with

many of the more widely capitalized market averages. The ETF that repre-

sents the DJIA is the SPDR Dow Jones Industrial Average ETF (symbol DIA).

The Standard & Poor’s (S&P) Composite, which comprises 500 stocks

representing well over 90 percent of the NYSE market value, is another

widely followed bellwether average. Its ETF is the SPDR S&P 500 (symbol

SPY). The index is calculated by multiply ing the price of each share by the

number outstanding, total ing the value of each company, and reducing the

answer to an index number.

Over the years, the S&P 500 has become the benchmark against which

professional money managers are judged. It is also the most widely traded

equity futures contract.

Most of the time, the DJIA and S&P 500 move in the same direction, but

there are times when a new high or low is achieved in one index but not the

other. Generally speaking, the greater the divergence, the greater the next move

in the opposite direction is likely to be. Chart 21.1 shows that in late 1968 the

S&P 500 reached a new all-time high, unlike the DJIA, which was not able to

chart 21.1 Key Market Averages, 1964–1978

Source: From Securities Research.

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