What Is The Dow Theory

distribution phase

Airline companies typically carry above-average levels of debt and will be more vulnerable to changes in interest rates. The airline business is cyclical and revenues are highly susceptible to economic changes. Even though Charles Dow is credited with developing Dow Theory, it was S.A.

jones industrial average

The Dow Theory system was tested against buy-and-hold for the period from 1929 to Sept-98. When the system identified the primary trend as bullish, a long position was initiated in a hypothetical index fund. When the system signaled a bearish primary trend, stocks were sold and the money was placed in fixed income instruments. By taking money out of stocks after bear signals, the risk of the portfolio is significantly reduced.

The final phase is characterized by thediscouraged sellingof buyers that held through the panic phase or bought during the recovery period. The discouraged selling is not as violent as in the panic phase. The final phase is characterized byphenomenal advancesas more and more of the public are drawn to the market. Thus, every known and foreseeable event is discounted, as is every condition that could affect the supply and demand of the individual stocks. Are well portrayed by Robert Rhea in his book “The Dow Theory” by meticulously examining the Wall Street Journal editorials by Charles H. Dow and William Peter Hamilton in the 19th century. It was among the earliest attempts to understand the market by using fundamentals that indicated future trends.

Below is a chart of the Dow Jones Transportation Average in 1992. Even though Hamilton and Dow did not make specific references to trend lines, a line has been drawn to emphasize the downward trajectory of the trend. Since the peak in February, a series of lower lows and lower highs formed to make a downtrend. There was a secondary rally in April and May , but the March high was not surpassed. According to the theory, asset prices reflect the health of the economy and business circumstances.

Closing Prices and Line Ranges

Intraday, day-to-day and possibly even secondary movements could be prone to manipulation. These short movements, from a few hours to a few weeks, could be subject to manipulation by large institutions, speculators, breaking news or rumors. Today, Hamilton would likely add message boards and day-traders to this list. Dow suggested that for a trend to be considered valid, the two indices must confirm each other.

By analyzing the reaction rallies and corrections, it is possible to judge the underlying strength of the primary trend. The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. It is a period marked by improving business conditions and increased valuations in stocks. This is considered the easiest stage to make money as participation is broad and the trend followers begin to participate.

They last 1-3 weeks and are generally short-term, counter-trend pullbacks like the one featured below. For example, here is a secondary downtrend within the current primary uptrend in the S&P 500. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

The Market Is Comprised of Three Trends

Trading activity is usually still moderated during this phase but is starting to increase. In October, the DJIA formed a higher low while the DJTA recorded a new low. After the higher low, the DJIA followed through with higher lows and highs, indicating an overall upward momentum. By early November, the DJTA had begun to confirm with the DJIA, and the primary trend had shifted from bearish to bullish.

Dow Theory 2.0 – Moneyshow.com

Dow Theory 2.0.

Posted: Wed, 08 Feb 2023 08:00:00 GMT [source]

In a bull market, a secondary move is considered a correction. In a bear market, secondary moves are sometimes called reaction rallies. Earlier in this article, a chart of Coca-Cola was used to illustrate reaction rallies within the confines of a primary bear trend. Below is a chart illustrating a correction within the confines of a primary bull trend. The primary trend is the general direction for prices, but it is not the only direction.


Thus, we believe that the https://forexdelta.net/ Theory strategy is not a viable strategy. Here is a monthly chart of Cable, the long term trend is bearish – Sterling has been weakening against the dollar for the best part of six years. This assumption means all information is included within an index of shares.

AMC’s stock jumps nearly 20% in 2 days, approaches bullish long … – Morningstar

AMC’s stock jumps nearly 20% in 2 days, approaches bullish long ….

Posted: Thu, 23 Feb 2023 12:26:00 GMT [source]

By 1896, the first DJIA was calculated using the top 12 stocks in the market. The initial calculation was a simple sum and divide that yielded 40.94 as the first published average. After the higher low, the DJIA followed through with a higher high later that month. This effectively changed the trend for the average from down to up. This was another non-confirmation and served notice to be on guard for a possible change in trend. The determination of a major trend has come to be known as a signal to Buy or Sell, although Dow never called them such.

Dow theory in stocks

PairGain Technology rose sharply due to a hoax posted on a fake Bloomberg site. However, once the hoax was revealed, the stock immediately fell back and returned to its primary trend. Other combinations of the above can occur with non-confirmations at various points and still qualify as « signals ». New all-time highs negate the need for pullbacks to confirm a new Buy. Both the Industrial and Transportation averages must confirm a trend. Manipulation is possible day-to-day but the primary trend cannot be manipulated.


The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders. At a minimum, these studies indicate at least 50% of aspiring day traders will not be profitable. This reiterates that consistently making money trading stocks is not easy. Day Trading is a high risk activity and can result in the loss of your entire investment. Espresso shall not be responsible for any unauthorized circulation, reproduction or distribution of any material or contents on and its various sub-pages and sub-domains.

Hence, what folhttps://traderoom.info/ after the distribution phase is a complete sell-off in the markets, also known as the mark down of prices. The selloff in the market leaves the public in an utter state of frustration. The Accumulation phase usually occurs right after a steep sell-off in the market.

  • Whenever we look at a stock, index, or commodity, for example, the first thing we want to do is to identify the primary trend.
  • Transport stocks are much more dependent on the economic environment than the average stock and will likely foreshadow economic growth.
  • In order for an up-trend to reverse, prices must have at least one lower high and one lower low .
  • After the low point of a downtrend in a bear market is established, a secondary uptrend bounce will occur.
  • Once the second index makes a new 52-week high, then the price action is seemed to have wider breadth and more likely to continue upwards.

What folhttps://forexhero.info/ the distribution phase is the markdown phase, following which the accumulation phase will complete the circle. The sixth tenet of Dow Theory contends that a trend remains in effect until there is a clear sign that the trend has reversed. Similarly, the market will continue to move in a primary direction until a force, such as a change in business conditions, is strong enough to change the direction of this primary move. I am a full-time investor and owner of Icon Economics – a macro research company focussed on providing contrarian investment ideas across FX, Equities, and Fixed Income based on Austrian economic theory. Formerly Head of Financial Markets at Fitch Solutions, I have 15 years of experience investing and analysing Asian and Global markets.

Who Was Charles Dow?

If one index, such as the Dow Jones Industrial Average, shows a new primary uptrend, but another remains in a primary downward trend, traders should not assume that a new trend has begun. When the volume was declining on higher prices and increasing on declining prices, this was an indication that an uptrend may be reversing. Conversely, when volume was less on price declines in a downtrend, and greater in market rallies, this could serve as a confirmation that a bear market was ending, and a bull market was beginning. The primary trend in a bull market is characterized by 3 phases. In the 1st phase, buyers are buying because of cheap prices resulting from the end of the bear market. One meaning of discount as a verb is to anticipate something that may have an impact on something being considered and making adjustments to it.

The second two theorems, dealing with volume and trading ranges, were not considered instrumental in primary trend identification by Hamilton. Volume was looked upon as a confirming statistic and trading ranges were thought to identify periods of accumulation and distribution. Collectively, they can be used to identify current market movements and inform investments in the market. A primary bear market is defined as a long sustained decline marked by deteriorating business conditions and subsequent decrease in demand for stocks.

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