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Made in the late nineteenth Century by Charles Dow, the Dow theory enunciates the principles of stock behavior. Charles Dow was also the founder of the Dow Jones and Co. To understand the behavior of the market as a whole, Charles Dow constructed two indices which are now known as Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA).The main observations of Charles Dow are as follows;
a) Most stocks respond in the same direction as the market moves. When the market goes up, the stock also goes up. When the market comes down the stock also comes down.
b) Averages as reflected by the indices would show three kinds of trends; the primary, the secondary and the minor trends. Charles Dow's theory was mainly concerned with the primary trends.
c) The theory proposed that the primary uptrend would have three moves.
d) The first uptrend will be caused by the initial investment made by well read and knowledgeable investors.
e) The second uptrend will be caused by good performance results of the company.
f) The third uptrend will be caused by the goodwill earned by the company due to the spread of the word of the good financial performance.
g) After the third stage has started ending, the well read investors who had invested initially will realize high returns as expected may not be able to be sustained and they may start selling the shares. This will result in the first downtrend.
h) When the non-sustainability becomes confirmed, the second move for selling would be initiated.
g) The final third move results from distress selling of the share.
h) This trend goes on until there is a confirmed reversal in the financials of the firm and earnings behavior of the share.
i) Optimism about earning starts a bullish trend and continues until when the averages cross the one acheived earlier.
j) An ensuing downtrend will again signal a bearish trend and both the averages drop below the previous low achieved.
k) After this secondary reaction, a basic uptrend can be expected.
Made in the late nineteenth Century by Charles Dow, the Dow theory enunciates the principles of stock behavior. Charles Dow was also the founder of the Dow Jones and Co. To understand the behavior of the market as a whole, Charles Dow constructed two indices which are now known as Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA).The main observations of Charles Dow are as follows;
a) Most stocks respond in the same direction as the market moves. When the market goes up, the stock also goes up. When the market comes down the stock also comes down.
b) Averages as reflected by the indices would show three kinds of trends; the primary, the secondary and the minor trends. Charles Dow's theory was mainly concerned with the primary trends.
c) The theory proposed that the primary uptrend would have three moves.
d) The first uptrend will be caused by the initial investment made by well read and knowledgeable investors.
e) The second uptrend will be caused by good performance results of the company.
f) The third uptrend will be caused by the goodwill earned by the company due to the spread of the word of the good financial performance.
g) After the third stage has started ending, the well read investors who had invested initially will realize high returns as expected may not be able to be sustained and they may start selling the shares. This will result in the first downtrend.
h) When the non-sustainability becomes confirmed, the second move for selling would be initiated.
g) The final third move results from distress selling of the share.
h) This trend goes on until there is a confirmed reversal in the financials of the firm and earnings behavior of the share.
i) Optimism about earning starts a bullish trend and continues until when the averages cross the one acheived earlier.
j) An ensuing downtrend will again signal a bearish trend and both the averages drop below the previous low achieved.
k) After this secondary reaction, a basic uptrend can be expected.
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