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Teoria de dow: Dow theory


However, subsequent work has focused almost exclusively on this use of the Theory. The table below displays all the price action that unfolded from the last primary bull market highs until the most recent breakups. For a trend to be established, Dow postulated indices or market averages must confirm each other. This means that the signals that occur on one index must match or correspond with the signals on the other. 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.


It is comprised of three primary trends, each made up of secondary and minor trends. The theory assumes that the market already has knowledge of every possible factor and that prices reflect current information. This implies that there is no need to investigate further why assets are priced the way they are but to act on price movements and volume and depend on signals and confirmation for trend reversals.

Primary bull market in SIL and GDX signaled on 4/4/23

If the market is making successive higher-highs and higher-lows the primary trend is up. If the market is making successive lower-highs and lower-lows, the primary trend is down. The setup for a potential primary bear market signal has been canceled. When a reversal in the primary trend is signaled by both the Industrials and Transports, the odds of the new trend continuing are at their greatest.

The following chart of the Dow Industrials illustrates these three phases during the years leading up to the October 1987 crash. Alfred Cowles in a study in Econometrica in 1934 showed that trading based upon the editorial advice would have resulted in earning less than a buy-and-hold strategy using a well diversified portfolio. Cowles concluded that a buy-and-hold strategy produced 15.5% annualized returns from 1902 to 1929 while the Dow theory strategy produced annualized returns of 12%. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

However, the longer a trend continues, the odds of the trend remaining intact become progressively smaller. The following chart shows how the Dow Industrials registered a higher high (point “A”) and a higher low (point “B”) which identified a reversal of the down trend (line “C”). The reversal of a downward primary trend occurs when the market no longer falls to lower lows and highs.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. By using this site, you agree to the Terms of Use and Privacy Policy.

Six basic tenets of Dow theory

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction. A) Market situation if one appraises secondary reactions not bound by the three weeks dogma. A trending market is when a price series continually closes either higher or lower over a number of periods. A head and shoulders pattern is an indicator that appears on a chart as a set of three peaks or troughs, with the center peak or trough representing the head.

William Goetzmann, Stephen Brown, and Alok Kumar believe that Cowles’ study was incomplete and that W.P. Hamilton’s application of the Dow theory from 1902 to 1929 produced excess risk-adjusted returns. An upward trend in Dow Theory is a series of successively higher peaks and troughs. A downward trend is a series of successively lower peaks and troughs.

The Dow Theory advocates caution, insisting that a possible reversal be confirmed by comparing indexes. Stock market averages must confirm each otherIn Dow’s time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Dow’s first stock averages were an index of industrial companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first.

Instead, the index moves in a series of lower highs followed by lower lows. In anticipation of a recovery from the recession, informed investors began to accumulate stock during the First phase (box “A”). A steady stream of improved earnings reports came in during the Second phase (box “B”), causing more investors to buy stock.

Anyone reading this blog does so with the understanding that this is strictly meant as an analytical exercise and does not proffer actionable advice in any way, shape or form. Trading and investing always entail risk and possible loss of funds and should only be undertaken after appropriate due diligence by the trader/investor and after consulting a registered investment adviser. The stock market discounts all newsStock prices quickly incorporate new information as soon as it becomes available.

The brown rectangles highlight the secondary reaction against the then-existing primary bull market. The violet rectangles show the rally that followed the secondary reaction lows that set up SIL and GDX for a primary bear market signal. The red horizontal lines highlight the secondary reaction lows whose breakdown signaled the primary bear market. The blue horizontal lines show the primary bull market highs whose confirmed breakup would signal a new primary bull market. The charts below display the price action from the last primary bull market highs until the most recent breakups.

Volume Must Confirm the Trend

These reactions typically last from one to three months and retrace from one-third to two-thirds of the previous Secondary trend. The following chart shows a Primary trend (Line “A”) and two Secondary trends (“B” and “C”). The overall goal of the Dow Theory is to identify the market’s primary trend through proof and confirmation. Charles Dow relied solely on closing prices and was not concerned about the intraday movements of the index.

Aspects of the theory have lost ground—for example, its emphasis on the transportation sector and railroads—but Dow’s approach forms the core of modern technical analysis. The Volume Confirms the Trend.The Dow Theory focuses primarily on price action. The following chart shows the Dow Industrials and the Dow Transports at the beginning of the bull market in 1982. The Dow Theory resulted from a series of articles published by Charles Dow in The Wall Street Journal between 1900 and 1902. The Dow Theory is the common ancestor to most principles of modern technical analysis.

Books by Dow theorists

Therefore, traders should wait for the price movement to break the trend line before coming to a conclusion on which way the market is headed. For example, if the price were to move above the line, it’s likely that the market would trend up. Minor trends are short-term movements lasting from one day to three weeks. Secondary trends are typically comprised of a number of Minor trends. The Dow Theory holds that, since stock prices over the short-term are subject to some degree of manipulation , Minor trends are unimportant and can be misleading.

The theory was derived from 255 editorials in The Wall Street Journal written by Charles H. Dow (1851–1902), journalist, founder and first editor of The Wall Street Journal and co-founder of Dow Jones and Company. George Schaefer organized and collectively represented Dow theory, based on Dow’s editorials. Dow himself never used the term Dow theory nor presented it as a trading system. Trend analysis is a technique used in technical analysis that attempts to predict future stock price movements based on recently observed trend data. Finally, minor trends are day-to-day price fluctuations in the market. It’s vital to remember that primary trend reversals can take months to present themselves—a change in price direction over a one-month, two-month, or even three-month period might only be a market correction.

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