ChAPter 2 Introduction to Dow theory
L e a r nIn g O b j eCtIv e sAfter studying this chapter, you should be able to:■ Understand the basic concepts and assumptions of Dow Theory
■ Apply the concepts of Dow Theory to forecast potential entry and exit points in the
market
■ Identify the strengths and weaknesses of applying Dow Theory
■ Explain the importance of price and volume confirmation as a basis for determining
potential market action
■ Highlight the current challenges to Dow TheoryD
ow Theory lays the basic foundation for modern day technical analysis. Its
premises underpin the very study of market action analysis and have with-
stood the test of time. In this chapter, we shall be discussing the basic assumptions
of Dow Theory and its relevance in today’s markets.2.1 Origins and Proponents of Dow Theory
Charles H. Dow is credited for much of the early work that led to what is known
today as Dow Theory. Dow’s successor, William P. Hamilton, carried on develop-
ing and organizing much of Dow’s original early writings, which included the
Wall Street Journal editorials that were published around the beginning of the
twentieth century. Hamilton’s work culminated in his book The Stock Market
Barometer. A close acquaintance of Dow’s, S. A. Nelson, published a book about
Dow’s work entitled The ABC of Stock Speculation and was the first person to
refer to Dow’s concepts and ideas as the “Dow Theory.”
Robert Rhea, a student of Hamilton, was later responsible for much of the cat-
egorizing, refining, and formal codification of Dow’s basic premises, which were