Unlocking the Secrets of the Stock Market: Understanding the Power of Dow Theory
The Dow theory is a technical analysis method that was developed by Charles Dow (Biography) in the late 19th and early 20th centuries. It is based on the idea that stock market trends can be predicted by studying the movements of certain market averages, such as the Dow Jones Industrial Average (check it on Yahoo).
According to the Dow theory, there are three types of market trends: primary, secondary, and minor. Primary trends are the long-term trends that last for several years, and they can be either bullish (upward) or bearish (downward). Secondary trends, also known as corrections, are short-term movements in the opposite direction of the primary trend. They can last for several weeks to a few months. Minor trends are even shorter-term movements that last for a few days to a week.
One of the key principles of the Dow theory is that the market tends to move in trends. This means that prices will continue to move in the same direction until a significant change in the underlying fundamentals occurs. As a result, technical analysts who follow the Dow theory will look for patterns in the market that indicate a change in the trend.
One example of how the Dow theory can be applied is by analyzing the movement of the Dow Jones Industrial Average (DJIA). Let’s say that the DJIA has been in a primary bullish trend for the past few years, and it has recently started to experience a secondary bearish trend. A technical analyst who follows the Dow theory would interpret this as a sign that the primary trend is still bullish, but that there may be a short-term correction before the upward movement resumes.
In summary, the Dow theory is a technical analysis method that is based on the idea that stock market trends can be predicted by studying the movements of certain market averages.
Technical analysts who follow the Dow theory look for patterns in the market that indicate a change in the trend and try to predict the direction of the primary trend in the future.
This article belongs to the Technical Analysis series.
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