The Dow Theory:
Originally proposed in the late nineteenth century by Charles H Dow, the Dow Theory is perhaps the Oldest and best known theory of technical analysis.
The theory consists of the following three types of market movements:
a. Daily fluctuations that is random.
b. Secondary movement or corrections that may last for a few weeks to some months; and
c. Primary trends representing bull and bear phases of the market.
The Dow Theory employs two of the Dow Jones Averages, the industrial average and the transportation average. A rise in both these average suggests a strong bull market and a decline would suggest a bear phase and if both are moving in the opposite direction the market would be uncertain as to the direction of the future prices.
The Short coming of the Dow Theory is that it is not a theory but an interpretation of the known data and it does not explains why the two average should be able to forecast the future stocks prices and there may be a considerable time lag between actual turning points and those indicated by the forecasts. Dow Theory works only when a long wide upwards or downward movement is registered in the market.
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