Dow Theory Triggered On Wednesday, July 20, 2023, the Dow Jones Transportation Average closed at record all-time highs. This is a bullish signal for the broader stock market, according to Dow Theory, a financial theory named after the father of technical analysis, Charles Dow.
Dow Theory is based on the relative price action of the Dow Jones industrial average and the Dow Jones Transportation Index. The theory states that if the transportation index makes a new high, the industrial average will soon follow. This is because the transportation index is a leading indicator of the economy, meaning that it tends to move before the industrial average.
The recent close of the transportation index at record highs suggests that the economy is on solid footing and that the stock market is poised for further gains. However, it is important to note that Dow Theory is not infallible and that there have been times when it has given false signals. As such, investors should not make any investment decisions based solely on this indicator.
The Dow Theory is a financial theory that was developed by Charles Dow in the late 19th century. It is based on the idea that the stock market moves in trends, and that these trends can be identified by analyzing the price movements of a select group of stocks.
The Dow Theory is composed of six main tenets:
The market has three movements: primary, secondary, and minor.
Primary trends last for months or years.
Secondary trends last for weeks or months.
Minor trends last for days or weeks.
The market discounts all news.
Stock market averages must confirm each other.
Trends are confirmed by volume.
The Dow Theory is still used by some investors today, but it is important to note that it is not infallible. There have been times when the theory has given false signals, and it is important to use it in conjunction with other indicators.
Here is a brief explanation of each of the six tenets of the Dow Theory:
The market has three movements: The Dow Theory divides market movements into three categories: primary, secondary, and minor. Primary trends are the most important, and they can last for months or years. Secondary trends are shorter-term corrections that occur within a primary trend. Minor trends are the shortest-term trends, and they can last for days or weeks.
Primary trends last for months or years: Primary trends are the most important trends in the Dow Theory. They are typically characterized by a sustained move in one direction, either up or down. Primary trends can last for months or years, and they are often accompanied by significant changes in the economy.
Secondary trends last for weeks or months: Secondary trends are shorter-term corrections that occur within a primary trend. They are typically characterized by a move in the opposite direction of the primary trend. Secondary trends can last for weeks or months, and they are often caused by temporary factors, such as news events or changes in investor sentiment.
Minor trends last for days or weeks: Minor trends are the shortest-term trends in the Dow Theory. They are typically characterized by a move of a few percentage points in one direction or the other. Minor trends can last for days or weeks, and they are often caused by technical factors, such as changes in trading volume or the pattern of price bars.
The market discounts all news: The Dow Theory states that the stock market quickly incorporates new information into prices. This means that there is no need to try to time the market based on news events. Instead, investors should focus on identifying the underlying trends in the market.
Stock market averages must confirm each other: The Dow Theory states that stock market averages must confirm each other before a trend can be considered valid. This means that if the Dow Jones Industrial Average is moving up, the Dow Jones Transportation Average should also be moving up. If the two averages are not moving in the same direction, then the trend is not considered to be valid.
Trends are confirmed by volume: The Dow Theory states that trends are confirmed by volume. This means that when a trend is in progress, there should be an increase in trading volume. If volume is declining, then it suggests that the trend is losing momentum.
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