3 DOW THEORY
The Dow theory is the oldest, and by far the most publicized, method of identifying major trends in the stock market. An extensive account will not be necessary here, as there are many excellent books on the subject. A brief explanation, however, is in order because the basic principles of the Dow theory are used in other branches of technical analysis.
The goal of the theory is to determine changes in the primary, or major, movement of the market. Once a trend has been established, it is assumed to exist until a reversal is proved. Dow theory is concerned with the direction of a trend and has no forecasting value as to the trend’s ultimate duration or size.
It should be recognized that the theory does not always keep ...