Dow Theory

The Dow Theory was derived from 255 Wall Street Journals written by Charles Dow. According to the Dow Theory at any given time you are likely to witness three forces in the market. There is a primary force that spans from one year to several years. There is an intermediate force which has a span of several weeks and there is a short term movement which may last from a matter of minutes to one day. Short term rally is generally lead by investor emotion and more over than not there is no fundamental supporting such a rally. There is a high probability that the rally was lead by some positive news.

If the market has fallen a considerable amount some people start buying and this phase is called accumulation of stock. This level is often referred to as the support level. At this time there is not much movement in the market as the demand of these traders is accounted for by the supply provided by the rest of the market. Once everyone else starts following the trend and the market starts moving in the opposite direction those who were accumulating the stock for so long now distribute the accumulated stocks. This is generally the resistance level. Dow also stated that trends exist in the market until the market establishes higher highs and lower lows when compared to the 200 day moving average. Once the market establishes higher highs or lower lows it is likely the trend in the market has changed.