Understanding the Dow Theory

Developed by Charles Dow, the Dow Theory is not just a stock market model. It's a comprehensive financial theory that interprets market trends and economic conditions using the Dow Jones Industrial Averages.

The theory categorizes market movements into three types: Primary trends lasting a year or more, secondary trends as market corrections, and tertiary, or minor, trends lasting less than three weeks.

Dow identified three market phases: Accumulation by savvy investors, public participation leading to a peak, and distribution phase where investors start to exit, leading to a bear market.

Volume must confirm the trend. Dow Theory stipulates that volume should increase if the price moves in the direction of the primary trend, and decrease during the secondary trend reversals.

Dow Theory asserts that signals on major market averages should confirm each other. For instance, the Industrial and Rail Averages should confirm trends mutually for a valid signal.

Critics argue the Dow Theory's relevance has diminished due to the evolution of markets and the economy. It doesn't account for real-time data, algorithmic trading, or the global interconnectedness of today's markets.