DOW THEORY REVISITED

Technical Analysis 101 is Dow Theory. If one is to have any understanding of Technical Analysis one must understand Dow Theory. Dow Theory is the basic tenant. The Dow Jones Industrials and its predecessors have been around now for 123 years when the first Dow Jones market average was published on July 3, 1884. That average had 11 stocks of which 9 were railroad stocks. In 1897 the index was split into two an Industrial Index with 12 stocks and a Railway Index with 20 stocks. In 1928 the Dow Jones Industrials was expanded to 30 stocks and in 1929 a Utility Index was started. The old rail index is really today’s Transportation Index.

Dow never wrote the theory. Instead he made a number of journal publications in of course his newspaper the Wall Street Journal. In 1902 it was published into a book by S.A. Nelson called the ABC of Stock Speculation. Dow Theory was thus introduced. It took, however, until 1932 before a full book was written on appropriately called Dow Theory by Robert Rhea.

So what is Dow Theory? It has 6 basic tenants as follows:

1. The market has three trends – First an uptrend is defined as a series of higher highs and higher lows. A downtrend is defined as a series of lower highs and lower lows. Dow divided his trends into three distinct categories – the primary, the secondary and the minor. His main concern was the primary that often lasted more than a year and sometimes for several years. The intermediate trend lasted for months and sometimes longer while the minor trend was measured in days and weeks. When we base our models we base them off of the intermediate trend. If the primary trend can be thought of as one huge wave, the intermediate and minor trends are sub waves of the bigger wave.

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