Security - Dow Theory

8/6/2019 Security - Dow Theory

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DOWTHEORY


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DOW THEORY

Is a form of technical analysis

Formulated from a series ofWall Street Journal

editorials authored by Charles H. Dow

From 1900 until the time of his death in 1902 Not only technical analysis and price action, but

also market philosophy

Uses trend analysis to determine which way the

market is headed Dow relied solely on closing prices for

determining trends, not intraday price

movements


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TENETS OF DOW THEORY

Market Discounts Everything

Market has Three Trends

Primary trends have Three Phases

Market Indexes Must Confirm Each Other

Volume Must Confirm The Trend

Trend Remains In Effect Until Clear Reversal

occurs


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TRENDS

An uptrend is defined by prices that form a series

of rising peaks and rising troughs

A downtrend is defined by prices that form a

series of declining peaks and declining troughs


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TYPES OF TRENDS

Uptrend Downtrend


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All information discounted into the markets and

reflected in the prices of stocks and indexes

Past, current and even future

Only information excluded is that which isunknowable

The Market Discounts Everything


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PRIMARY TREND

Major trend of the market

Most important one to determine

Also impact the secondary and minor trends

within the market Generally last between one and three years but

could vary

Remains in effect until there is a confirmed

reversal

The Three-Trend Market


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SECONDARY TREND

Moves in the opposite direction of the primary

trend

Correction to the primary trend

Typically lasts between three weeks and threemonths

Its moves are often more volatile than those of

the primary move



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MINOR TREND

Lasting less than three weeks

Corrective moves within a secondary move

Not of major concern to Dow theory followers as

Dow-Theory focuses on longer Terms



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The Accumulation

Phase Public Participation

Phase

The Excess Phase

The Distribution

Phase Public Participation

Phase

The Panic Phase

Upward Trend Downward Trend

The Three Phases OfPrimary Trends


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A major cannot be signaled unless both indexes

are in agreement.

The reason for this is that a primary trend is the

overall direction of the stock market, which inDow theory is a reflection of business conditions

in the economy. When the stock market is doing

well, it is because business conditions are good;

when the stock market is doing poorly, it is due

to poor business conditions. If the two Dowindexes are in conflict, there is no clear trend in

business conditions.

Market Indexes Must Confirm Each Other


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Volume is used as a secondary indicator to help

confirm what the price movement suggests

It follows that volume should increase when the

price moves in the direction of the trend anddecrease when the price moves in the opposite

direction of the trend

Conversely, if volume runs counter to the trend,

it is a sign of weakness in the existing trend.

Volume Must Confirm The Trend


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Trend remains in effect until the weight of

evidence suggests that it has been reversed

The goal is not to confuse a true reversal in the

primary trend with a secondary trend or briefcorrection

A reversal in the primary trend is signaled when

the market is unable to create another successive

peak and trough in the direction of the primary

trend

Trend Remains In Effect Until Clear Reversal Occurs


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TREND REVERSAL

Upward Trend Reversal Downward Trend Reversal


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CRITICISM AND CURRENT RELEVANCE

More advanced techniques and tools have

expanded on this theory and begun to take its

place

Followers can miss out on large gains due to theconservative nature of a trend-reversal signal

Over time, the economy - and the indexes

originally used by Dow - has changed


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THANK YOU

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Security - Dow Theory