Bear Market

The stock market may be older than you can imagine. And that does not mean that the methods of analysis of decades ago were invalidated. Even with all the technological devices that support the analysis, Dow's theory, created almost a century ago, remains the foundation for doing technical analysis, evaluating stock price and market philosophy.

Charles Henry Dow, founder of the Dow Jones & Company, developed the theory. But later, it was enhanced and organized by SA Nelson, author of "The ABC of Stock Market Speculation," William Peter Hamilton, Robert Rhea and George Schaefer, as there was no compiled material, but several editorials published by Dow at The Wall Street Journal, of which he was owner and publisher.

The set of hypotheses and theorems that shape this method of analysis are extremely valid for the present day and have become axioms on Wall Street, which have applicability to individual actions, but are broader in scope, and are best applicable to groups of actions or market indices.

Dow Theory

• Dow constructed two indexes:

• Dow Jones Industrial Index (DJII)

• To identify the health of blue-chip companies which make goods • Dow Jones Transportation Index

• To identify the health of companies which distribute goods

Basic Tenets of Dow Theory

1.The averages discount everything except acts of God

2.There are three types of trend Major trends go through three phases

3.Volume should confirm the trend

4.Price action determines the trend

5.The averages must confirm each other

Dow Theory is the most famous method of identifying major trends in the stock market, very much focused on the market direction. Dow used price behaviour is the stock market as a barometer of the business conditions.

Of all, I can't stress enough about trend. The importance of follow a trend and not to go against trying to guess a possible reversal is of summit importance. Refer for charts bellow for reference;

Using multiple time frames really helps to identify the trend. Markets trend by nature. Although we may see shorter-term fluctuations that may move counter-trend, the odds always favor prices heading in the direction of the Primary Trend. This is the trend-following community’s favourite tenet, of course. There is no simple definition of a trend, other than a series of higher highs and higher lows for an uptrend, and lower lows and lower highs in a downtrend.

The principle here to keep in mind is that the probability is always that the trend in place will continue, rather than reversing. That’s the main point we want to keep in mind from this particular Dow Theory.

I hope this has given some light on how I approach the marketplace using 130 year old analysis. And still works today!