Dow Theory - Definition and Overview

Dow Theory is a theory about how to build wealth given the nature of movements of the US stock market. The theory originally derived from the editorials of Charles H. Dow (1851-1902), journalist, first editor of the Wall Street Journal and co-founder of Dow Jones and Company. It was refined after his death by William P. Hamilton, Charles Rhea and E. George Schaefer. Dow himself never used the term "Dow Theory".

Dow Theory asserts that bull markets are characterised by a primary trend that consists of three major upward thrusts (of the major indices) interrupted by two pull-backs, i.e. periods of weakness. During the whole movement there can be expected to be declining bottoms, each lower than its predecessor, with the whole movement depicted as usually consisting of a few intermediate (medium-term) declines and rallies.

References

• J. M. Hurst: The Profit Magic of Stock Transaction Timing. Englewood Cliffs, N.J.: Prentice-Hall, 1977. (Analysis of the empirical character of US stock market movements prior to 1973)
• John Murphy: Technical Analysis of Futures Markets. New York, N.Y.: New York Inst. of Finance, 1986.