Dow Theory

Theory based off a series of editorials written by Charles H. Dow, founder of the Wall Street Journal and co-founder of Dow Jones and Company.  The theory states six facts.  (1) The equity market has three movements: the primary movement which lasts the longest,  the medium swing which lasts from over a week to a couple of months, going back across the primary movement.  Lastly the short swing is the swings that happens daily in the stock market.

(2) Market trends are broken down into three phases; the accumulation phase in which a minority of investors that know information accumulate stock, the rapid price change that occurs once the rest of the market’s investors have caught on to the trend, and finally the unloading by investors after speculation has drawn the price high.  (3) The stock market will incorporate company news quickly, and the price will reflect that news.  (4) Industries that rely on each other will move in the same general direction but if their prices do not, then it is a signal that something will change in the future.  (5) High volume means that a stock’s price is the true market price.  (6) Trends will exist until proven otherwise.  For example, the market in a general up trend might have periods of loss but the trend is still continues, until there is a decisive, prolonged break in the trend