The Six Tenets of Dow Theory - Explained (SIMPLE)

<p>Today, we discuss the Six Tenets of Dow Theory.</p> <p>1. THE AVERAGES MUST DISCOUNT EVERYTHING Stock prices reflect both current + future expectations of general economic activity. &nbsp;Buying and selling will affect the averages. &nbsp;Even natural disasters, which obviously cannot be anticipated, are very quickly discounted into the averages. &nbsp;THE MARKET HAS THREE TRENDS Dow defined an uptrend = series of rising peaks and troughs Downtrend = series of successively lower peaks and troughs. He considers each trend to be made up of 3 parts: &nbsp;PRIMARY, SECONDARY and MINOR. &nbsp;Primary trend (tides) : longest of the trends = the overall, broad, long-term movement of security prices. &nbsp;Can last a long time, sometimes even years. &nbsp;&nbsp;Is called a BULL MARKET or a BEAR MARKET. &nbsp;Secondary (waves) : intermediate trend = CORRECTIVE REACTIONS to the primary trend. Down in a bull market vs Up in a bear market. They usually last 3 weeks to 3 months. Combats excessive speculation.</p> <p>In a BULL MARKET: &nbsp;&nbsp;ACCUMULATION PHASE: &nbsp;starts at the end of the last stage of the bear market. &nbsp;Here prices are depressed and economic news is negative. Farsighted and informed investors start picking up stock at cheap prices in anticipation of rosier times. &nbsp;(Contrarian buying) 2nd stage : improving economic conditions + improving corporate earnings. The media catches on + the public begins to buy 3rd stage : positive economic conditions + bullish stories and newscasts + a buying frenzy. Investors believe that the market is unstoppable, and bid up prices to high levels. Farsighted investors (so-called SMART MONEY) should start selling. &nbsp;In a BEAR MARKET: DISTRIBUTION PHASE: &nbsp;began at the end of the last stage of the bull market. SMART MONEY investors start selling. The 2nd stage : strong selling due to negative economic activity and deteriorating earnings. &nbsp;Volumes start to pick up as does the rate of selling.</p> <p>3rd stage of bear market : negative news stories as