Dow Theory: Introduction

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By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com
Any attempt to trace the origins of technical analysis would ineitably lead to Dow
theory! "hile more than #$$ years old, Dow theory remains the foundation of much
of what we %now today as technical analysis!
Dow theory was formulated from a series of Wall Street Journal editorials authored
by &harles '! Dow from #($$ until the time of his death in #($)! These editorials
reflected Dow*s beliefs on how the stoc% mar%et behaed and how the mar%et could
be used to measure the health of the business enironment!
Due to his death, Dow neer published his complete theory on the mar%ets, but
seeral followers and associates hae published wor%s that hae e+panded on the
editorials! Some of the most important contributions to Dow theory were "illiam ,!
'amilton*s -The Stoc% .ar%et Barometer- /#())0, Robert Rhea*s -The Dow Theory-
/#(1)0, 2! 3eorge Schaefer*s -'ow 4 'elped .ore Than #$,$$$ 4nestors To ,rofit 4n
Stoc%s- /#(5$0 and Richard Russell*s -The Dow Theory Today- /#(5#0!
Dow belieed that the stoc% mar%et as a whole was a reliable measure of oerall
business conditions within the economy and that by analy6ing the oerall mar%et, one
could accurately gauge those conditions and identify the direction of ma7or mar%et
trends and the li%ely direction of indiidual stoc%s!
Dow first used his theory to create the Dow 8ones 4ndustrial 4nde+ and the Dow 8ones
Rail 4nde+ /now Transportation 4nde+0, which were originally compiled by Dow for
The Wall Street Journal! Dow created these inde+es because he felt they were an
accurate reflection of the business conditions within the economy because they
coered two ma7or economic segments9 industrial and rail /transportation0! "hile
these inde+es hae changed oer the last #$$ years, the theory still applies to current
mar%et inde+es!
.uch of what we %now today as technical analysis has its roots in Dow*s wor%! :or
this reason, all traders using technical analysis should get to %now the si+ basic tenets
of Dow theory! ;et*s e+plore them!