Charles H. Dow - Dow Theory

  1. The market has three movements. (1) The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. (2) The "medium swing", secondary reaction or intermediate reaction may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement. (3) The "short swing" or minor movement varies with opinion from hours to a month or more. The three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

  2. Market trends have three phases. The theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phrase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is suppying (demanding). Eventually, the market catches to these astute investors and a rapid price change occurs (phase2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

  3. The stock market discounts all news.

  4. Stock market averages must confirm each other.

  5. Trends are confirmed by volume.

  6. Trends exist until definitive signals prove that they have ended.

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