1. Chapter 2 Dow theory 道氏理論

2. Brief history 1882 Dow Jones & Company 1884 Dow average
Wall Street Journal
1884 Dow average
mixed railroad and industry firms, 11 stocks in total
1897 Dow proposed industry (12 stocks) and transportation (20stocks) indices
1928 Dow industry average (30 stocks)
1903 The term Dow theory was formally introduced in “The ABC of stock speculation” by Nelson.
1978 Reprint
1922 “The stock market barometer” by Hamiton
1932 “Dow theory” by Rhea (New York: Barron’s)

3. Basic tenets The averages discount everything.
The market has three trends. (Primary, Secondary, Minor)
Major trends have three phrases.
The two averages must confirm each other. (指Dow industry and transportation averages須同一方向)
Volume must confirm the trend.
Volume should increase in the direction of the major trend.
A trend is assumed to be in effect until it gives definite signals that it has reversed.

4. The two averages must confirm each other

5. The two averages must confirm each other

6. 3) The market has three trends: major, intermediately, minor
Primary/major (tide): more than a year, and possibly for several years
Secondary/intermediate (wave): three weeks to three months
Minor (ripple): less than three weeks

7. Figure 4-1 Intermediate cycles in a primary trend (uptrend, downtrend)

8. Figure 13-2 (Frost and Prechter, p. 21
Figure 13-2 (Frost and Prechter, p.21. Copyright ©1978 by Frost and Prechter.)

9. Time span of the three trends
Murphy
Pring
Primary
1 to several years
Average 18 months, From less than 1 year to several years
Secondary
3 weeks to 3 months
4 weeks minimum
Minor
Less than 3 weeks
1 to 6 weeks

10. A major trend has three phrases
Accumulation phase
Public participation phase
Distribution phase

11. 4) The two averages must confirm each other.
Two averages: Dow industry and transportation weighted averages
A trend is assumed to be in effect until it gives definite signals that it has reversed
* (major reversal) No important bull or bear signal could take place unless both Dow industry and transportation averages gave the same signal.
* (continuation) When the two averages diverge from each other, Dow assumed that the prior trend was still maintained.

12. Figure 3-4 Dow Theory requires both averages to confirm

13. 5) Volume must confirm the trend
Definitions:
Uptrend has a pattern of rising peaks and troughs.
Downtrend has successively lower peaks and troughs.
Volume should increase in the direction of the major trend.
In a major uptrend, volume would then increase as prices move higher, and diminish as prices fall.
In a major downtrend, volume should increase as prices drop, and diminish as they rally.

14. 修正或反轉(新趨勢)
Question:
Is it a correction in the existing trend or the first leg of a new trend in the opposite direction?

15. Failure Swing (reversal pattern) C is higher than A or not
Figure 2.3a Failure Swing. The failure of the peak at C to overcome A, followed by the violation of the low at B, constitutes a “sell” signal at S.
Q: Sell at point S? (Yes)

16. Non-failure Swing C is higher than A or not
Figure 2.3b Non-failure Swing. Notice that C exceeds A before falling below B. Some Dow theorists would see a “sell” signal at S1, while other would need to see a lower high at E before turning bearish at S2.
Q: Sell at point S1 or S2? (S2)

17. Failure and Non-failure Swing C is below than A or not

18. Some words about Dow Dow relied exclusively on closing prices.
The presence of lines in the averages are referring to horizon patterns, lateral patterns, or sideways, that sometimes occurred in the charts.
The sideways trading ranges usually play the role of corrective phrases and are usually referred to as consolidations.
Dow signal
A Dow Theory buy signal usually occurs in the second phase of an uptrend as price penetrates a previous intermediate peak.
From 1920 to 1975, Dow Theory signals captured 68% of the moves in the Industrial and Transportation Averages and 67% of those in the S&P 500 Composite Index (Source: Barron’s).
Stock as economic indicators.
Stock market averages as a leading economic indicator.
For an excellent review of Dow theory, see Technical analysis of stock trends (Edwards & Magee).

19. Stocks at yahoo finance
Options on the Dow
Dow industry average DJX
Dow transportation average DJTA
Dow utility average DJUA
Stocks at yahoo finance
Dow industry average ^DJI
Dow transportation average ^DJT
Dow utility average ^DJU