Technical Analysis Explained by Martin J Pring

Author:Martin J Pring [Pring, Martin J]
Language: eng
Format: epub
ISBN: 9780071826556
Publisher: McGraw-Hill Education
Published: 2014-04-15T04:00:00+00:00

U.S. Equities

There is no ideal index that represents the movement of “the market.” It’s true that the majority of stocks move together in the same direction most of the time, but there is rarely a period when specific stocks or several industry groups are not moving contrary to the general direction of the trend. The general level of stock prices is basically measured in two principal ways. The first, known as an unweighted index, takes a mean average of the prices of a wide base of stocks; the second also takes an average of the prices of a number of stocks, but in this case, they are weighted by the capitalization of each company (i.e., the number of shares outstanding multiplied by their price). The first method monitors the movement of the vast majority of listed stocks, but since the second gives a greater weight to larger companies, movements in a market average constructed in this way more fairly represent changes in the value of investor portfolios. For this reason, weighted averages are usually used as the best proxy for “the market.” These averages are compiled from stocks representing public participation, market leadership, and industry importance.

Several price indexes have been developed that measure various segments of the market. Their interrelationship offers useful clues about the market’s overall technical condition. Chapter 3 discussed in detail the relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average, but there are many other useful indexes, such as the Dow Jones Utility Average, unweighted indexes, and a few bellwether stocks groups. They are examined in this chapter in the context of their contribution to the U.S. market’s overall technical structure.

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