This article needs additional citations for verification. The Dow theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation. The six basic tenets of Dow theory as summarized by Hamilton, Rhea, and Schaefer are described below. The “main movement”, primary movement dow trading hours major trend may last from less than a year to several years.
It can be bullish or bearish. The stock market discounts all news Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow theory agrees with one of the premises of the efficient-market hypothesis.
Stock market averages must confirm each other In Dow’s time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first.
Trends are confirmed by volume Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the “true” market view. Trends exist until definitive signals prove that they have ended Dow believed that trends existed despite “market noise”. Markets might temporarily move in the direction opposite to the trend, but they will soon resume the prior move.
The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Alfred Cowles in a study in Econometrica in 1934 showed that trading based upon the editorial advice would have resulted in earning less than a buy-and-hold strategy using a well diversified portfolio. Cowles concluded that a buy-and-hold strategy produced 15. After numerous studies supported Cowles over the following years, many academics stopped studying Dow theory believing Cowles’s results were conclusive. In recent years however, Cowles’ conclusions have been revisited.