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Corporate Accounting and Financial Management · Security Analysis

Technical Analysis and Dow Theory for CS Executive

Updated 11 October 2026 · Fact-checked

Technical analysis predicts future share prices by studying past prices and trading volume, mostly through charts and indicators. Dow Theory is its base: markets move in three trends (primary, secondary, minor), and a trend continues until clear signals show it has reversed. To answer, define the tool, show how it signals buy or sell, and state limits.

Understand Technical Analysis and Dow Theory

Technical analysis studies the market itself, not the company. The analyst looks at past prices and volume and assumes that price patterns repeat. Fundamental analysis asks what a share is worth. Technical analysis asks where the price is heading and when to act.

It rests on three assumptions. First, price reflects all available information. Second, prices move in trends that tend to persist. Third, history repeats itself because investor behaviour repeats. Note that the first assumption sits against the weak form of the Efficient Market Hypothesis, which says past prices cannot predict future prices. This is the main criticism of technical analysis.

Dow Theory comes from Charles Dow. It says the market moves in three trends at once: the primary trend (long term, lasting from one year to several years, a bull or bear market), the secondary trend (a correction against the primary trend, lasting weeks to a few months) and the minor trend (day-to-day noise, lasting less than about three weeks). A bull market has three phases: accumulation, public participation and distribution. A bear market has distribution, panic selling and despair. Other tenets: averages discount everything, trends are confirmed by volume, and two indices (Dow originally used the Industrial and Rail averages) must confirm each other. A trend is assumed to continue until a definite reversal signal appears.

Charts show the price history. A line chart joins closing prices. A bar chart shows open, high, low and close for each period. A candlestick chart shows the same with a coloured body. A point-and-figure chart plots only price changes of a set size and ignores time. Support is a price level where falling prices tend to stop because buyers step in. Resistance is a level where rising prices tend to stop because sellers step in. When price breaks through resistance, that level often turns into support, and the reverse also happens.

Indicators add a signal. A moving average smooths prices: a simple moving average is the average of the last n closing prices. A buy signal comes when price crosses above the moving average from below. A sell signal comes when it crosses below. Volume confirms the move: a rise with rising volume is strong, a rise on falling volume is weak. Other tools are the Relative Strength Index (RSI), which shows overbought and oversold conditions, and breadth measures such as the advance-decline line. Chart patterns include head and shoulders (a reversal pattern), double top and double bottom.

Key rules to remember

Simple moving average (SMA)
SMA = (P1 + P2 + ... + Pn) ÷ n
P is the closing price of each of the last n periods. Drop the oldest price and add the newest to roll it forward.
Moving average crossover rule
Price > moving average: buy signal. Price < moving average: sell signal.
Signal comes when the price line crosses the average line. Short average crossing above long average is also a buy signal.
Relative Strength Index (RSI)
RSI = 100 − [100 ÷ (1 + RS)], where RS = average gain ÷ average loss
Commonly over 14 periods. Above 70 is read as overbought, below 30 as oversold.
Dow Theory trends
Primary (1 year or more) > Secondary (weeks to months) > Minor (under about 3 weeks)
Learn the three trends and their durations.
Volume confirmation rule
Price up + volume up = strong. Price up + volume down = weak.
Applies the same way to downtrends.

How to solve Technical Analysis and Dow Theory questions

Use this order for both theory and numerical questions on technical analysis.

  1. 1Read the verb. 'Explain' needs a definition, working and a conclusion. 'Compute' needs numbers and a signal.
  2. 2Define technical analysis in one line and contrast it with fundamental analysis.
  3. 3Name the tool asked (Dow Theory, chart, support and resistance, moving average, RSI, volume).
  4. 4For theory, list its parts with one line each: three trends, three phases, tenets.
  5. 5For numbers, write the formula first, then compute each average or ratio on separate lines.
  6. 6State the signal: buy, sell or hold, and say why.
  7. 7Close with a limitation, such as subjectivity or conflict with the weak-form EMH.

Quickest way: Three-line answer frame

When to use it: Use when time is short in a 5 to 6 mark theory question.

  1. Line 1: define the tool in plain words.
  2. Line 2: list its key parts or the rule for buy and sell.
  3. Line 3: give one use and one limitation.
  4. For moving averages, compute only the latest average and compare with the latest price.

Common mistakes in Technical Analysis and Dow Theory

  • Mixing up support and resistance

    Both are price levels and the names sound alike.

    Fix: Support is the floor under falling prices. Resistance is the ceiling over rising prices.

  • Treating Dow Theory trends as one trend

    Students remember only the bull and bear market idea.

    Fix: Always name all three: primary, secondary and minor, with duration and role.

  • Computing a moving average with the wrong number of periods

    Students include a price outside the last n days.

    Fix: Mark the last n prices, add them, divide by n, then roll forward by dropping the oldest.

  • Giving a buy signal when price is below the average

    Students confuse the direction of the crossover.

    Fix: Buy when price crosses above the average. Sell when it crosses below.

  • Ignoring volume in the answer

    Students focus on price alone.

    Fix: Add a line saying volume should confirm the price move, as Dow Theory requires.

  • Presenting technical analysis as certain

    Charts look precise.

    Fix: State that signals are probabilities, are subjective and conflict with weak-form market efficiency.

Worked examples

Example 1

The closing prices of a share of Sundaram Textiles Ltd. over five days are ₹100, ₹104, ₹108, ₹106 and ₹112. Compute the 5-day simple moving average and state the signal on day 5.

Show the solution
  1. Formula: SMA = sum of prices ÷ n.
  2. Sum = 100 + 104 + 108 + 106 + 112 = 530.
  3. SMA = 530 ÷ 5 = ₹106.
  4. Day 5 closing price is ₹112, which is above the average of ₹106.
  5. Price is above its moving average, which is a buy signal (or a continuing uptrend).

Answer: The 5-day moving average is ₹106. Since the price of ₹112 is above it, the signal is to buy or hold.

Example 2

Explain the three trends and phases of a bull market under Dow Theory.

Show the solution
  1. Define Dow Theory: markets move in trends, and a trend continues until a clear reversal signal.
  2. Primary trend: long-term movement lasting one year or more, a bull or bear market.
  3. Secondary trend: a correction against the primary trend, lasting weeks to a few months.
  4. Minor trend: short-term fluctuation lasting under about three weeks.
  5. Bull market phases: accumulation (informed investors buy when sentiment is low), public participation (prices rise with improving news and volume) and distribution (informed investors sell as optimism peaks).
  6. Add that volume must confirm the trend.

Answer: Dow Theory recognises primary, secondary and minor trends. A bull market moves through accumulation, public participation and distribution, with volume confirming the primary trend.

Exam tips

  • Theory questions dominate this topic. Learn the Dow Theory tenets as a numbered list.
  • Sketch a simple support and resistance line diagram if the question allows; it earns presentation marks.
  • For moving averages, show the sum and division clearly and write the signal as a sentence.
  • Add one line contrasting technical with fundamental analysis to complete the answer.
  • Mention a limitation in every answer; it shows you see the full picture.

Practice questions from Security Analysis

Technical Analysis and Dow Theory in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Technical Analysis and Dow Theory: frequently asked questions

What is Dow Theory in simple words?

It says share markets move in three trends at once: primary, secondary and minor. A trend is taken to continue until a clear reversal signal appears. Volume and confirmation by two indices support the signal.

What are support and resistance levels?

Support is a price level where a falling price tends to stop as buyers enter. Resistance is a level where a rising price tends to stop as sellers enter. A break beyond either level can start a new move.

How does a moving average help in technical analysis?

It smooths daily price swings to show the trend. A price crossing above the average is read as a buy signal and below as a sell signal.

How is technical analysis different from fundamental analysis?

Fundamental analysis studies a company's financials and economy to find intrinsic value. Technical analysis studies past prices and volume to predict price direction and timing.