Dow Theory was first conceived and developed at the end of the 19th Century by Charles Dow, who along with Edward Jones and Charles Bergstresser founded the Dow Jones Industrial Average in 1896. While Dow Theory was developed by Charles Dow, he was unable to complete his ideas around this as he died in 1902. it was later expanded upon by by William Hamilton in the 1920s, Robert Rhea in the 1930s, and E. George Shaefer and Richard Russell in the 1960s.
So what is Dow Theory? Dow Theory is a trading methodology that is based on the efficient market hypothesis. Charles Dow believed that the market was - in aggregate - a good indicator or measure of the the state of the economy or confidence in the economy. Therefore, if one could analyze the overall market, one could identify trends that could forecast the direction of the market and individual stocks.
Part of the analysis included an observation that markets experience three layers of trends. The primary layer or trend is that markets are either in a bull or a bear market. Within each of the latter primary trends there are secondary trends working against the primary trend such as pullbacks or rallies, but these occurr in the context of the primary trend which prevails while in motion. These secondary trends can last from 3 weeks to several months. Lastly there a tertiary trends which are minor and may last for a week or two or three and represent static noise.
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