Finance Capital .info

Dow Theory

By
Chad Langager
and
Casey Murphy
, senior analyst of ChartAdvisor.com

Any attempt to trace the origins of technical analysis would
inevitably lead to Dow
theory
. While more than 100 years old, Dow theory remains
the foundation of much of what we know today as technical
analysis.

Dow theory was formulated from a series of Wall Street
Journal
editorials authored by Charles H. Dow from 1900
until the time of his death in 1902. These editorials reflected
Dow’s beliefs on how the stock market behaved and how the
market could be used to measure the health of the business
environment.

Due to his death, Dow never published his complete theory
on the markets, but several followers and associates have
published works that have expanded on the editorials. Some of
the most important contributions to Dow theory were William P.
Hamilton’s “The Stock Market Barometer” (1922), Robert Rhea’s
“The Dow Theory” (1932), E. George Schaefer’s “How I Helped
More Than 10,000 Investors To Profit In Stocks” (1960) and
Richard Russell’s “The Dow Theory Today” (1961).

Dow believed that the stock market as a whole was a
reliable measure of overall business conditions within the
economy and that by analyzing the overall market, one could
accurately gauge those conditions and identify the direction of
major market trends and the likely direction of individual
stocks.

Dow first used his theory to create the Dow Jones Industrial Index and the
Dow Jones Rail Index (now
Transportation Index), which were originally compiled by Dow
for The Wall Street Journal. Dow created these
indexes because he felt they were an accurate reflection of the
business conditions within the economy because they covered two
major economic segments: industrial and rail (transportation).
While these indexes have changed over the last 100 years, the
theory still applies to current market indexes.

Much of what we know today as technical analysis has its
roots in Dow’s work. For this reason, all traders using
technical analysis should get to know the six basic tenets of
Dow theory. Let’s explore them.

(To read more, check out The Basics Of Technical
Analysis
.)

Dow Theory: The Market
Discounts Everything

FinanceCapital.info

Add comment