Dow theory

The oldest organised body of technical thinking in Western markets, and one its author never wrote. Charles Dow set out observations in Wall Street Journal editorials around the turn of the twentieth century; William Hamilton and Robert Rhea assembled them into a theory after his death. It is a reading of what the market averages were saying about business conditions rather than a system for placing orders.

The tenets usually listed are six. The averages discount everything known. Movement runs in a primary trend lasting a year or more, a secondary reaction running against it, and minor fluctuations inside that. A primary trend passes through accumulation, participation and distribution phases. The averages must confirm one another. Volume should expand in the direction of the primary trend. And a trend is assumed to continue until a reversal is signalled by the averages themselves.

The confirmation tenet is where the disagreement lives. Dow compared the industrial average with the rail average, on the logic that goods manufactured must also be shipped, so a rise in one unsupported by the other was suspect. That logic described an industrial economy far more closely than it describes a services and technology one, and how much weight the modern transport average still carries is genuinely argued. What survives the argument is the framework of nested trends and the insistence that a claim about direction is retrospective, which passed into almost every technical method that followed.