Introduction to Dow Theory
The initial general sentiment tends to be slightly less bearish. The public begins to
participate as rising prices becomes more obvious and as more bullish news is re-
ported. At higher prices, margin debt starts to increase as the public scrambles to
invest in the rapidly rising market. The uptrend phase tends to last longer than the
downtrend phase due to less capital and unrealized profit at risk, at lower prices.
The downtrend phase normally starts to accelerate as more companies start
to report increasingly bearish news. The uninformed traders and investors begin
to unload positions. As prices begin to fall unexpectedly, the public begins to
liquidate positions. Bearish sentiment continues to intensify as prices sink to
new depths. The downtrend phase tends to be shorter lived than the uptrend
phase, due to the larger amounts of capital and unrealized profit at risk, at
higher prices.
Distribution normally occurs after a prolonged and rapid rise in prices. Com-
panies tend to outperform and most media and news headlines are extremely
bullish. The uninformed market participants tend to be extremely optimistic, buy-
ing up whatever shares are available in the market at any price, normally referred
to as being in a state of irrational exuberance. Margin debt is at extreme levels.
The smart investors continue to liquidate shares in a very gradual manner during
the distribution process, again careful not to drive down prices too rapidly so that
they may continue to sell at the higher prices. The distribution phase is normally
shorter in duration than the accumulation phase, due to the larger amount of
capital and unrealized profit at risk at higher prices, at the top of the market. See
Figure 2.15.
Also, the longer the accumulation or distribution lasts, the greater will be its
subsequent breakout move. See Figure 2.16.a trend persists until Its reversal Is Indicated
In Dow Theory, a trend is assumed to persist until there is evidence to the contrary.
Trend changes are identified by a penetration of a previous significant peak or
trough. Therefore, unless a prior support or resistance level is breached, the trend
is assumed to be still intact. See Figure 2.17.fIgure 2.15 The Idealized Three Phases of a Primary Bull Trend.