Charts, Trends & Dow Theory

Question 1 (10 marks)

(a) Bullish if Close > Open, bearish if Close < Open. Body = |Close − Open|, Range = High − Low. (6 = 2 per day)

Why: the body reflects net directional conviction; the range reflects total volatility. (½ correct type + ½ body + ½ range ≈ round to 2 each.)

(b) Tuesday: body spans Open 106 (top) to Close 100 (bottom, since bearish).

• Upper wick = High − Open = 107 − 106 = 1 (1 mark)
• Lower wick = Close − Low = 100 − 99 = 1 (1 mark)
• Interpretation: small wicks + large body relative to range means sellers dominated the whole session with little rejection at extremes — a decisive bearish day, sellers in control. (2 marks)

Question 2 (12 marks)

(a) Compare each swing to the same-type prior swing. (4 = 1 each)

• 46 (low) vs 40 (low) → HL
• 60 (high) vs 52 (high) → HH
• 55 (low) vs 46 (low) → HL
• 58 (high) vs 60 (high) → LH

(b) The series HL → HH → HL indicates a healthy uptrend. However, the final swing (58 < 60) is a Lower High, the first structural warning of possible trend change / loss of momentum. (2 for uptrend up to that point, 2 for identifying the LH warning)

(c) A confirmed reversal (to downtrend) requires the price to break below the most recent higher-low, which is 55. Breaking below 55 produces a lower-low, and combined with the LH at 58, gives the LH + LL sequence that defines a downtrend. (2 for level = 55, 2 for reasoning)

Question 3 (10 marks)

(a) Slope $m = \dfrac{42-30}{6-2} = \dfrac{12}{4}=3$. (1) Using point A: $P = 30 + 3(t-2) = 3t + 24$. (2)

(b) Parallel ⇒ same slope 3. Through $(4,44)$: $44 = 3(4)+c \Rightarrow c = 32$. Channel line: $P = 3t + 32$. (2) Channel width = difference in intercepts = $32 - 24 = 12$ (vertical). (2)

(c) At $t=10$:

• Support (trendline): $3(10)+24 = 54$. (1.5)
• Resistance (channel): $3(10)+32 = 62$. (1.5)

Question 4 (10 marks)

(a) Tenet: "Volume must confirm the trend." In an uptrend, volume should expand on advances. Rally 3 makes a new high on falling volume (−30%) — a bearish divergence; the advance lacks participation/conviction, suggesting the uptrend is weakening and may be near exhaustion. (2 tenet + 2 interpretation)

(b) Tenet: "The averages must confirm each other." Industrials new high but Transports failing = non-confirmation (divergence between the two averages), which under Dow Theory undermines the validity of the new high and warns of a potential top. (2 + 1 for naming non-confirmation)

(c) Any two: (1.5 each)

• Volume divergence signals weak demand behind the move.
• Averages non-confirmation removes Dow-Theory validation of the breakout.
• Higher risk of a false breakout / bull trap; unfavourable risk-reward; wait for confirmation.

Question 5 (8 marks)

(a)

• Linear chart plots absolute change: $20-10=10$ vs $60-50=10$ — equal in appearance. (1)
• Log chart plots percentage change: $10\to20 = +100\%$; $50\to60 = +20\%$. (2)
• On a log chart the $10→$20 move appears larger (100% > 20%), correctly reflecting proportional growth. (2)

(b) Under Dow Theory the higher timeframe (weekly) defines the primary trend (up); the daily downtrend against it is a secondary (corrective / reaction) trend. (2) Recommended bias: trade with the primary — treat the daily pullback as a potential buying opportunity, not a short setup. (1)

[
  {"claim":"Tuesday body=6, range=8, wicks 1 and 1","code":"O,H,L,C=106,107,99,100; body=abs(C-O); rng=H-L; up=H-O; low=C-L; result=(body==6 and rng==8 and up==1 and low==1)"},
  {"claim":"Trendline through (2,30),(6,42) is P=3t+24","code":"t=symbols('t'); m=(42-30)/(6-2); line=m*(t-2)+30; result=(simplify(line-(3*t+24))==0)"},
  {"claim":"Channel line through (4,44) parallel slope3 is 3t+32; width 8-diff... =12","code":"c=44-3*4; width=32-24; result=(c==32 and width==12)"},
  {"claim":"At t=10 support=54, resistance=62","code":"sup=3*10+24; res=3*10+32; result=(sup==54 and res==62)"},
  {"claim":"Percentage moves 100% and 20%","code":"p1=(20-10)/10*100; p2=(60-50)/50*100; result=(p1==100 and p2==20)"}
]