Dow theory is the method of
identifying trends in the stock market. It was given
by Charles Dow in 1900. It studies the major movements
in the market with a view of establishing trends. It
only describes the direction of market trends and does
not forecast future movements and durations or size of
the market trends. In 1932 the Dows theory was
formalized by Robert Rheas. It majors the size and
duration of trends proposed. It uses the behavior of
the stock market rather than forecasting stock prices
themselves. It assumes that stocks follow underline
The Averages Discount Everything: - Every
possible factor affecting supply and demand must be
reflected in the market averages.
The Market Has Three Trends: - The primary ,
secondary and minor. An uptrend has a pattern of
rising peaks and troughs. A downtrend would be just
the opposite with successively lower peaks and
Major Trends Have Three Phases: - the
accumulation phase, represents informed buying. The
second phase, where most technical trend follower
begin to participate, takes place as price begin to
advance rapidly. The final phase is characterized by
informed investor who begin to distribute when
no one else does.
The Average Must Confirm the Trend: - No
important bull or bear market signal could take place
unless both averages give the same signal.
Volume Must Confirm the Trend: - Volume should
expand in the direction of the major trend. It is an
important factor in confirming the signals generated
on the price charts.
A trend is assumed to be in effect until it
gives definite signal that it has reversed.