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 Dow theory
In 1887 Charles Dow (as in "The Dow Jones") developed two stock market "averages":The Industrial Average, made up of 12 blue chip stocksThe Rail Average, made up of 20 railroad companiesIn 1900 he wrote a series of articles noting that the direction of prices in each average appeared to be based on a set of rules. Collectively, these became known as The Dow Theory and the key precepts are summarised below.Dow TheoryA share price reflects everything that is known about a stockThis means that all the positives and all the negatives about a company are assumed to be known by the market and built into the share price. Implicitly, no stocks are undervalued, because the market has "perfect" knowledge.At any given time, there are 3 trends unfolding in the stock market:The primary trend lasting for more than one yearThe secondary trend which is a corrective reaction to the primary trend and usually lasts form one to three monthsThe tertiary or minor trend which is a short term movement lasting from one day to three weeks.Primary trends have three phasesAggressive buying by well informed investors ahead of economic recovery while most investors are still bearish about the marketGeneral buying by the majority of investors as company earnings pick up and economic conditions improveHeadlong rush into stocks by everybody, as companies report record earnings. Meanwhile, the well informed investors are starting to sell even though prices may be rising.Volume Confirms the TrendRallies in the market are accompanied by increasing volume, and falls with decreasing volume.A Trend Continues Until a Reversal SignalIf a primary trend is confirmed by the movement of both averages it will continue until there is a definite reversal signal. So once a primary trend has started the chances are it will continue, but once it has been around for a while the chances of continuation are less.
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Dow theory - In 1887 Charles Dow (as in "The Dow Jones") developed two stock market "averages":The Industrial Average, made up of 12 blue chip stocksThe Rail Average, made up of 20 railroad companiesIn 1900 he wrote a series of articles noting that the direction of prices in each average appeared to be based on a set of rules. Collectively, these became known as The Dow Theory and the key precepts are summarised below.Dow TheoryA share price reflects everything that is known about a stockThis means that all the positives and all the negatives about a company are assumed to be known by the market and built into the share price. Implicitly, no stocks are undervalued, because the market has "perfect" knowledge.At any given time, there are 3 trends unfolding in the stock market:The primary trend lasting for more than one yearThe secondary trend which is a corrective reaction to the primary trend and usually lasts form one to three monthsThe tertiary or minor trend which is a short term movement lasting from one day to three weeks.Primary trends have three phasesAggressive buying by well informed investors ahead of economic recovery while most investors are still bearish about the marketGeneral buying by the majority of investors as company earnings pick up and economic conditions improveHeadlong rush into stocks by everybody, as companies report record earnings. Meanwhile, the well informed investors are starting to sell even though prices may be rising.Volume Confirms the TrendRallies in the market are accompanied by increasing volume, and falls with decreasing volume.A Trend Continues Until a Reversal SignalIf a primary trend is confirmed by the movement of both averages it will continue until there is a definite reversal signal. So once a primary trend has started the chances are it will continue, but once it has been around for a while the chances of continuation are less.
Dow theory : in 1887 charles dow (as in "the dow jones") developed two stock market "averages":the industrial average, made up of 12 blue chip stocksthe rail average, made up of 20 railroad companiesin 1900 he wrote a series of articles noting that the direction of prices in each average appeared to be based on a set of rules. collectively, these became known as the dow theory and the key precepts are summarised below.dow theorya share price reflects everything that is known about a stockthis means that all the positives and all the negatives about a company are assumed to be known by the market and built into the share price. implicitly, no stocks are undervalued, because the market has "perfect" knowledge.at any given time, there are 3 trends unfolding in the stock market:the primary trend lasting for more than one yearthe secondary trend which is a corrective reaction to the primary trend and usually lasts form one to three monthsthe tertiary or minor trend which is a short term movement lasting from one day to three weeks.primary trends have three phasesaggressive buying by well informed investors ahead of economic recovery while most investors are still bearish about the marketgeneral buying by the majority of investors as company earnings pick up and economic conditions improveheadlong rush into stocks by everybody, as companies report record earnings. meanwhile, the well informed investors are starting to sell even though prices may be rising.volume confirms the trendrallies in the market are accompanied by increasing volume, and falls with decreasing volume.a trend continues until a reversal signalif a primary trend is confirmed by the movement of both averages it will continue until there is a definite reversal signal. so once a primary trend has started the chances are it will continue, but once it has been around for a while the chances of continuation are less.
