Dow Theory

The six principles 1. The market discounts everything 2. The market moves in three trends primary, secondary and minor 3. The primary trends consists of 3 phases ccumulation, !ig move and excess Distri!ution, !ig move and despair ". The average must confirm each other #. $olume must confirm the trend %. Trends exists until their reversal is confirmed &rimary market movements 1. &rimary movements represent the !road underlying trend of the market 2. 'an last from a few month to many years 3. (eferred to as !ull and !ear markets ". )nce the primary trend has !een identified, it will remain in effect until proven otherwise #. *ain advantage of dow theory is ena!le investors to identify primary trend and invest accordingly %. +o one can tell when a trend will end !efore hand ,econdary market movements 1. ,econdary movements run counter to the primary trend 2. (eactionary in nature 3. 'orrection in !ull market ". (eaction rallies, re!ound in !ear market #. 'haracteristics- (etrace 1.3 to 2.3 of the primary move with #/0 the typical %. 1aster and sharper than the preceding primary trend 2. t the end, usually a dull period 3ust !efore the turnaround 4. 5ows are sometimes accompanied !y a high6volume washout day *inor market movement 1. Daily fluctuations 2. 5imited forecasting value 3. 7seful only when grouped with other days to form a pattern for analysis ". 8hen a series of days is com!ined, a structure may start to emerge and analysis !ecomes !etter grounded Three stages of primary !ull market

Stage 1: accumulation 5argely indistinguisha!le from last reaction rally of a !ear market &essimism, excessive at the end of a !ear market, still reigns &u!lic is out of stocks, news from corporate is !ad and valuation are usually at historical low ,mart money !egins to accumulate stocks Stage 2: big move 7sually the longest ,ees the largest advance in prices *arked !y improving !usiness conditions and increased valuation of stocks 9arning !egins to rise again and confidence starts to mend 9asiest stage to make money Stage 3: excess *arked !y excess speculation and the appearance of inflationary pressures &u!lic is fully involved in the market $aluations are excessive and confidence is extraordinary high :rrational exu!erance and !u!!le stage 8hen the taxi ca! drivers !egin to offer tips, the top cannot !e far off

Three stages of primary !ear market

Stage 1: distribution ,mart money !egins to reali;e that !usiness conditions are not <uite as good as once thought, they start to sell stocks &u!lic are still willing !uyers +o !ad news to indicate a !ear market 1orecasters remain !ullish =ut stocks !egin to lose a !it of their luster and decline !egins ,wift and <uick reaction rally !ut fails to make new high, then !reak !elow previous low confirm second stage Stage 2: big move 5argest move =usiness conditions !egins to deteriorate 9arnings estimate are reduced, shortfalls occur, profit margins shrink and revenues fall

s !usiness conditions worse, the sell off continues Stage 3: despair ll hopes are lost $aluations are low !ut selling continues =ad news a!undant 9conomics outlook !leak +o !uyer is to !e found )nce stock fully reflects the worst possi!le outcome, the cycle !egins again.