Dow Theory
Introduction
The Dow theory has been around for almost 100 years, yet even in today's volatile and technology-driven markets, the basic components of Dow theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, the Dow theory addresses not only technical analysis and price action, but also market philosophy. Many of the ideas and comments put forth by Dow and Hamilton became axioms of Wall Street. While there are those who may think that it is different this time, a read through The Dow Theory will attest that the stock market behaves the same today as it did almost 100 years ago.
The Dow theory presented below has been taken from Robert Rhea's book, The Dow Theory. Although Dow theory is attributed to Charles Dow, it is William Hamilton's writings that serve as the corner stone for this book and the development of the theory. Also, it should be noted that most of the theory was developed with the Dow Jones Rail and Industrial averages in mind. Even though many concepts can be applied to individual stocks, please keep in mind that these are broad concepts and best applied to stocks as a group or index. When possible, we have also attempted to link some of the realities of today's market with the Dow theory as explained by Dow, Hamilton and Rhea.
Background
Charles Dow developed the Dow theory from his analysis of market price action in the late 19th century. Until his death in 1902, Dow was part owner as well as editor of The Wall Street Journal. Although he never wrote a book on the subject, he did write some editorials that reflected his views on speculation and the role of the rail and industrial averages.
Even though Charles Dow is credited with developing the Dow th ...