DowTheory
FromBearMarketstoBullMarkets—How
toPredictMarket
Movementswiththe
OriginalTheoryofTechnicalAnalysis
TableOfContentsIntroductionChapter1–WhatIsDowTheory?Chapter2–The3AssumptionsofDowTheory–ThePriceTrendCan'tBeManipulated–TheMarketReflectsEverything
–TheTheoryIsNotInfallibleChapter3–UnderstandingMarketMovements–PrimaryTrend–SecondaryMovement–DailyFluctuationsChapter4–The3StagesofBullandBearMarkets–BullMarkets–BearMarketsChapter5–TheBasisforTechnicalAnalysis
Conclusion
IntroductionIwanttothankyouverymuchandcongratulateyoufordownloadingthebook, DowTheory—FromBearMarketstoBullMarkets—HowtoPredictMarketMovementswiththeOriginalTheoryofTechnicalAnalysis.Inthisbook,you’lldiscover
dowtheorywhichisthebasisoftechnicalanalysis.Byunderstandingthistheory,you’llhaveaseriousadvantageoverthevastmajorityoftradersandinvestorswhotry(andfail)totradebasedonstrategies,candlestickpatterns,etc.withoutevertakingthetimeunderstandthiscriticalmaterial.Bytheendofthisbook,
you’llunderstandtherhythmicmovementsofthemarkets — andhowtotakeadvantageofitforprofitabletradingandinvesting!Thanksagainfordownloadingthisbook,Ihopeyouenjoyit!
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Chapter1-WhatIsDowTheory?
Ifyouarereadingthis,thenyou’realreadyonthewaytobeingbetterinformedthanmanyinvestorsare.Say‘Dow’tomostpeopleandthey’llunderstandthatyouaretalkingaboutthemainstockindexintheUnitedStates.Whattheywon’t
realiseisthattheDowTheoryisactuallyawayofthinkingaboutinvestmentmarketsandrationalizingtheirmovesandlongtermdirection.ThisinvestmentmethodologywasoriginallyvoicedbyCharlesDow,thefatheroftheDowJonesIndex,andthendevelopedbyS.ANelsonandWilliamHamiltoninthefirst25yearsofthe20thcenturyafterDowhad
passedaway.
Chapter2-The3AssumptionsofDowTheory
Dow’stheoryofmarketshangsonthreeassumptions.
ThePriceTrendCan'tBeManipulated
Thepriceofafinancialinstrumentmightbemanipulatedintheshorttermbutoveralongtimeperiod,itisimpossibletodoso.It’sabitlikesaying“themarketisbiggerthananyindividual”:
which,ofcourse,itis.Alargesingleinvestor,oraninstitution,orgroupofspeculators,mightbeabletomovethepriceinadesireddirectioneitherthroughtradingvolume,rumor,ornewsoveraperiodofminutes,hours,orevenweeks.Thereareexamplesofthisinindividualstocksonanalmostdailybasis.Oneofthemostspectaculareffortsto
manipulatemarketsoccurredinthelate1970’s/early1980’s,whentheHuntBrotherstriedtocornerthemarketinsilverandpushthepriceskywards.Foratime,aboutamonthortwo,theyweresuccessful.Silverrosetoaround$60.Thenitcrashedtoaround$10,thepricewhereithadstoodwhentheHuntsstartedbuying.Anotherrecentexamplecamewhen,intheearly1990’s,the
UKgovernmenttriedtopropupthevalueofsterlingwithintheERMsystem.Forawhiletheymanagedthetrick.Thensterlingfellthroughthefloor,andwasforcedoutoftheERM.Hamiltonconcludedthat,eventhoughitmightbepossibletomanipulateindividualstocks,themarketiswaytoobigtobemanipulated.
TheMarketReflectsEverythingT hemarketaverages,suchastheDowJones,takeeverythingintoconsideration,allofthetime.ThevalueoftheDowJonesIndex,forexample,reflectsallinvestorsentiment–thehopes,fears,concerns,optimism,andpessimism–ofallitsparticipants.Thisincludesthe
listedcompanies,investors,speculators,andregulators.Italsoreflectseverythingelsethatisknownaboutamarketatanygivenmoment.Interestrates,andexpectationsforthemareknown.Currentbusinessclimateiswelldocumented,asarepredictionsforthefuture.Companyearnings,andexpectations,arealreadyinthemarketplace.Thepolitics
ofthedayandimpendingelectoralchangeisalreadypricedin.Shockstothemarket,unexpectedevents,wars,orpoliticalupheaval,mayoccur.Thesewillaffectthemarketintheshortterm,butthenitwillreturntotrend.
TheTheoryIsNotInfallibleUnlikemanytheoristswhendiscussingtheirowntheories,DowandHamiltoncametotheconclusionthattheDowTheoryisnotperfect.Infact,theyconcludedthatnotheorycouldbeperfect.Ifthereweresuchamarketbeatingtheory,thentheinvestorwhohaditwouldquicklybeatall
marketsandowneverything!WhatDowandHamiltonsay,however,isthattheDowTheorygivesinvestorsawaytotakeemotionoutoftrading,toidentifytheprimarytrend,andbetterevaluatebullishandbearishsignals.DowTheoryputsforwardthattherearethreetypesofpricemovement.Recognizingthesemovements,howthey
interactwitheachother,andthencomparingtotheprimarytrend,helpsatradertocatchthebigswings,thelargemarketmovesthatimproveinvestingprofitmanytimes.Thetwoacceptedtheneedtowatchthemarketsclosely,andnotedailyandweekly,evenmonthlypricefluctuations.Settingtheseagainsttheprimarytrendlets
aninvestorbetterpickentryandexitpoints.
Chapter3-UnderstandingMarketMovements
Therearethreetypesofpricemovement,eachwithitsspecificelementsandtimeframes.
PrimaryTrendTheprimarytrendisthebroad,underlyingmotionofthemarketoveranextendedperiod.Whenwetalkaboutbullandbearmarkets,wearereallytalkingabouttheprimarytrend.Thistrendwillremaininplaceuntil,well,untilitchanges!Therearefourseparatesignalsthatwillidentifythechangeofatrend.
Up-trendingandDown-trendingAnup-trendseesaseriesofhigherhighsandhigherlows.ThepeaksandtroughsoftheDowJones’smovementsoscillateinarhythmicincreasingpattern.Adowntrendseesaseriesofrhythmiclowerhighsandlowerlows.Thedowntrendisbrokenwhenalowisfollowedbya
higherhigh,ratherthanalowerhigh,andthenthenextlowisalsohigherthantheprevious.Thischangeoftrendisconfirmedwhenthenewhigherhighisbroken.Themarketmovementhasturnedpositive,andanewbullmarketisinplace.ConfirmingAveragesConfirmtheTrendWhenHamiltonproducedtheDowTheory,theRailroads
werethemaindriverofeconomicactivity.Transportinggoodsandservicestotradearoundtheworldwasconductedprimarilyoverthetracks.Hamiltoncontendedthatbeforeeconomicactivitycouldincrease,rawmaterialswouldhavetobetransported.So,hefeltthatanincreaseinrailactivitywouldbetheforebearofwidermarketactivity,andusedthe
RailroadIndexasaconfirmationaverage.Hetheorizedthatforanewtrendtobeconfirmed,itwouldhavetobeconfirmedbybothindices.Ifoneoftheindiceshitanewhighorlow,thentheotherwouldhavetoquicklyfollowsuitforthenewtrendtobeinplace,andtheDowTheorysignaltobevalid.Itissimilartoday.ManyDow
theoristsusetheAirlineIndustryasthepreferredconfirmationindex,airlineshavingreplacedrailroadsintransportationimportance.VolumeisKingHamiltonconsideredthatmarketvolumewasoneofthemostimportantdriversofprimarytrend.Inabullmarket,volumeshouldbeheavierontheadvances(thehigherhighs)thanthe
declines(thehigherlows).Theoppositeshouldholdforbearmarkets.However,highvolumescouldalsoindicatetheimpendingchangeoftrend(rememberthattheoriesaren’tinfallible).BreakoutfromaTradingRangeThemarketoftentravelssidewaysoveraseveralmonths.Thisperiodwouldeitherbeaperiodof
accumulation,followedbyabreaktotheupside,oraperiodofdistribution,followedbyabreaktothedownside.Whichitiscannotbeascertaineduntilthebreakisconfirmed.
SecondaryMovementTheseruncountertotheprimarytrend.Forexample,abeartrendingmarketmaybenefitfromarallyperiod,andabullmarketmaysufferabearcorrection.Thesereactionarymovementscanlastfromdaystomonths,buttendtobefasterandsharperthantheprecedingprimarytrend.Themovecanbe
anythingbetween33%to66%,with50%thetypicalmove.Attheendoftherallyorcorrection,itisusualtoseeaperiodofreflection.Marketvolumedrops,pricevolatilityfalls,andthemarketisconsidered‘dull’.Thistypeoftradingpatternaugursinaturnaroundtoprimarytrendagain.
DailyFluctuationsPricesofindividualstocksandmarketindiceswillfluctuateonalargerrelativebasisdaytodaythanwhenviewedoveralongtime.Toomuchcredencepaidtothesefluctuationscanleadtopoorinvestmentdecisions,andpossiblelosses.Atradershouldalwaysconsiderdailypricemovementsin
conjunctionwiththebiggerpicture.
Chapter4-The3StagesofBullandBearMarkets
Themarketmovesinaccordancewiththreestages,andbullandbearmarketsalsowillhavecountersecondarymovements.
BullMarketsStage1–Accumulation.Similarinnaturetothelastreactionaryrallyofabearmarket,pessimismstillreignssupreme,butstocksarenotwidelyheld,andthereforesoldinloweramounts.Corporatenewsisbad,andvaluationswilllikelybeathistoriclows.Atthisstage,stockshave
beguntofindabottomandlongterminvestorswillbelookingtobuyvalue.Afterthefirstrallypetersout,thebearsdeclarethebearmarkettostillbeinplace.Itiswhenthenextpeakisseenhigherthanthefirstthatthenewbullmarketisconfirmed,andinvestorsmovethemarkettostage2.Stage2–TheBigMoveThisstagelaststhelongestof
allthreestages,andmovesthemarketfurthestinvalue.Economicconditionsimprove,earningsrise,confidencereturns.Itiseasytomakemoneybyinvestingit.Stage3–ExcessSpeculationandexpectanceofeverincreasingassetpricestakeshold.Moneycan’tcomeintothemarketquickenough.Publicshareownershipis
high;thenumberofcompaniesgoingpublicincreases,asdoesmergerandacquisitionactivity.Valuationsareathistorichighs.Thisisthestagewheremostmarketbullslosemoney.
BearMarketsStage1–DistributionVolumesarelow,themarketsappearstotrendsideways.Smartmoneybeginstogetoutofstocks.Thepublictakeuptheslack,believingstockwillstillmoveforward.Mostanalystsandforecastersstillpredictgoodthingsforcompanies,stocks,andthewidermarket.Areactionrally
willfollowthefirstmoderatefall,andthiscouldbeswiftlystartedandfinished.Itisatthisstagethatalowerhighandthenabreakbelowthepreviouslowwillconfirmthenewbearmarket.Stage2-TheBigMoveThetrendisfirmlyinplace:businessconditionsworsen,companyprofitsfall,andstockpricesretreat.Analystscutestimates,andtheselloff
continues,draggingthemarketlower.Stage3–DespairSometimescalledcapitulation,investorsseenohopeforprofitsfrombeinglongofstocks.Thoughvaluationsarelow,investorsbelievethemarketwillstillheadlowerandshunstocks.Corporatenewsisbad,andthemarketwillcontinuetofalluntilallbadnewsis
pricedin.
Chapter5-TheBasisforTechnicalAnalysis
DowTheoryunderscoresthebasisformuchtechnicalanalysistoday.Ittakesintoconsiderationfundamentalsandemotions,andthenattemptstoallowthetraderorinvestortodiscoverlong-term
trendsandtakeadvantageoffluctuationswithinthosetrendsasthemarketandstocksmoverhythmicallyinsidetheprimarytrend.Fordaytraders,itisofrelativelylittleuseotherthantobeabletoidentifythebiggerpicturewithinwhichthedaytraderoperates.Itrequiresinvestorstoignoreassumptionsandestimates,andtoactaccordingtoknown
facts.Inconclusion,usingtheDowTheoryshouldbeanotherarrowtoaninvestor’sbow.Itisnotthebe-allandend-all(remember,thetheoryisn’tinfallible),butshouldbeconsideredasatooltoaddtotheothersavailabletous.AmodernphrasethatperhapssumsuptheDowTheoryisthis:MaketheTrendYourFriend.
UsetheDowTheorytohelpspotthattrend.
ConclusionThankyouagainfordownloadingthisbook!Youshouldnowhaveadeepunderstandingoftherhythmicmovementofthemarketsandhowtotakeadvantageofitforprofitabletradingandinvesting.Finally,ifyouenjoyedthis
book,pleasetakethetimetoshareyourthoughtsandpostareviewonAmazon.It’dbegreatlyappreciated!Thankyouandgoodluck!
Bonus:DownloadtheFreeTradingToolkitGetinstantaccesstofreecheatsheets,workbooksandguidestohelpyoubecomeaprofitabletraderor
investor.Asaspecialthanksfordownloadingthisbook,we'veputtogetheratoolkitofexclusiveresources,including…-Ourexclusiveebook:HowtoProtectYourTradingProfits-Downloadablecheatsheetsforprovenoptiontradingstrategies-Ourstep-by-stepguide
forusingademotradingaccounttomaximizeyourprofits-Plus,brand-newebooks,downloads,workbooks,cheatsheets,videosandmoreeachmonth
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www.zantrio.com/kindle
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