Investments, tenth edition

 Example  12.4 

Moving Averages 

  Week  

  DJIA  

  5-Week 

Moving 

Average  

  Week  

  DJIA  

  5-Week 

Moving 

Average  

 1  

13,290  

 

 11  

13,590  

13,555 

 2  

13,380  

 

 12  

13,652  

13,586 

 3  

13,399  

 

 13  

13,625  

13,598 

 4  

13,379  

 

 14  

13,657  

13,624 

 5  

13,450  

13,380  

15  

13,699  

13,645 

 6  

13,513  

13,424  

16  

13,647  

13,656 

 7  

13,500  

13,448  

17  

13,610  

13,648 

 8  

13,565  

13,481  

18  

13,595  

13,642 

 9  

13,524  

13,510  

19  

13,499  

13,610 

 10  

13,597  

13,540  

20  

13,466  

13,563 

 Figure 12.3 

Share price and 50-day moving average for Intel 

  Source: Yahoo! Finance, August 27, 2012 (finance.yahoo.com). 

30

29

28

27

26

25

24

23

22

21

20

19

Nov11

Sep11

Jan12

Mar12

May12

Jul12

INTC

50–day MA

A

B

as of 24-Aug-2012

Intel Corporation

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7/17/13   3:46 PM

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  Behavioral Finance and Technical Analysis 

403

 Other techniques also are used to uncover potential momentum in stock prices. Two 

of the more famous ones are Elliott wave theory and Kondratieff waves. Both posit the 

existence of long-term trends in stock market prices that may be disturbed by shorter-term 

trends as well as daily fluctuations of little importance. Elliott wave theory superimposes 

long-term and short-term wave cycles in an attempt to describe the complicated pattern of 

actual price movements. Once the longer-term waves are identified, investors presumably 

can buy when the long-term direction of the market is positive. While there is consider-

able noise in the actual evolution of stock prices, by properly interpreting the wave cycles, 

one can, according to the theory, predict broad movements. Similarly, Kondratieff waves 

are named after a Russian economist who asserted that the macroeconomy (and therefore 

the stock market) moves in broad waves lasting between 48 and 60 years. Kondratieff’s 

assertion is hard to evaluate empirically, however, because cycles that last about 50 years 

provide only two independent data points per century, which is hardly enough data to test 

the predictive power of the theory.