THE HAnDbook of TEcHnIcAl AnAlysIs
to look for confirmation between large cap and smaller cap indices like the
S&P500 and Russell 2000 as a more reliable barometer of market action.
2.4 Chapter Summary
As we have seen, Dow Theory forms the basis for much of technical analysis in
the twenty‐first century. Although technical analysis has evolved significantly since
Dow’s time, many practitioners still regard the basic application of Dow Theory as
one of the most reliable approaches in determining and confirming the existence
of a trend. The incorporation of the concept of market phases and volume confir-
mation within Dow Theory has also significantly impacted the way investors and
traders participate in the market, more than a century after its introduction.
Chapter 2 Review Questions
- Describe the basic tenets of Dow Theory.
- Give examples of the primary trend being manipulated.
- Is Dow Theory still relevant in today’s market?
- Describe the main weaknesses of Dow Theory.
- Explain why volume should expand in the direction of the existing trend.
- In what ways is accumulation similar to distribution?
- Why is the secondary reaction more problematic than the primary trend?
- What are the main differences between Dow’s and Ralph N. Elliott’s determi-
nation of a trend?
referenCes
W. P Hamilton. 2006. The Stock Market Barometer. New York: Cosimo Classics.
S. A. Nelson. 2007. The ABC of Stock Speculation. Marketplace Books.
Robert Rhea. 1994. The Dow Theory. Flint Hill, VA: Fraser Publishing Co.
Richard Schabacker. 1997. Technical Analysis and Stock Market Profits. Upper Saddle
River, NJ: FT Press.
Jack Schannep. 2008. Dow Theory for the 21st Century: Technical Indicators for Improv-
ing Your Investment Results. Hoboken, NJ: John Wiley & Sons.
