dow theory: from bear markets to bull markets— how to...

DowTheory

FromBearMarketstoBullMarkets—How

toPredictMarket

Movementswiththe

OriginalTheoryofTechnicalAnalysis

TableOfContentsIntroductionChapter1–WhatIsDowTheory?Chapter2–The3AssumptionsofDowTheory–ThePriceTrendCan'tBeManipulated–TheMarketReflectsEverything

–TheTheoryIsNotInfallibleChapter3–UnderstandingMarketMovements–PrimaryTrend–SecondaryMovement–DailyFluctuationsChapter4–The3StagesofBullandBearMarkets–BullMarkets–BearMarketsChapter5–TheBasisforTechnicalAnalysis

Conclusion

IntroductionIwanttothankyouverymuchandcongratulateyoufordownloadingthebook, DowTheory—FromBearMarketstoBullMarkets—HowtoPredictMarketMovementswiththeOriginalTheoryofTechnicalAnalysis.Inthisbook,you’lldiscover

dowtheorywhichisthebasisoftechnicalanalysis.Byunderstandingthistheory,you’llhaveaseriousadvantageoverthevastmajorityoftradersandinvestorswhotry(andfail)totradebasedonstrategies,candlestickpatterns,etc.withoutevertakingthetimeunderstandthiscriticalmaterial.Bytheendofthisbook,

you’llunderstandtherhythmicmovementsofthemarkets — andhowtotakeadvantageofitforprofitabletradingandinvesting!Thanksagainfordownloadingthisbook,Ihopeyouenjoyit!

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Chapter1-WhatIsDowTheory?

Ifyouarereadingthis,thenyou’realreadyonthewaytobeingbetterinformedthanmanyinvestorsare.Say‘Dow’tomostpeopleandthey’llunderstandthatyouaretalkingaboutthemainstockindexintheUnitedStates.Whattheywon’t

realiseisthattheDowTheoryisactuallyawayofthinkingaboutinvestmentmarketsandrationalizingtheirmovesandlongtermdirection.ThisinvestmentmethodologywasoriginallyvoicedbyCharlesDow,thefatheroftheDowJonesIndex,andthendevelopedbyS.ANelsonandWilliamHamiltoninthefirst25yearsofthe20thcenturyafterDowhad

passedaway.

Chapter2-The3AssumptionsofDowTheory

Dow’stheoryofmarketshangsonthreeassumptions.

ThePriceTrendCan'tBeManipulated

Thepriceofafinancialinstrumentmightbemanipulatedintheshorttermbutoveralongtimeperiod,itisimpossibletodoso.It’sabitlikesaying“themarketisbiggerthananyindividual”:

which,ofcourse,itis.Alargesingleinvestor,oraninstitution,orgroupofspeculators,mightbeabletomovethepriceinadesireddirectioneitherthroughtradingvolume,rumor,ornewsoveraperiodofminutes,hours,orevenweeks.Thereareexamplesofthisinindividualstocksonanalmostdailybasis.Oneofthemostspectaculareffortsto

manipulatemarketsoccurredinthelate1970’s/early1980’s,whentheHuntBrotherstriedtocornerthemarketinsilverandpushthepriceskywards.Foratime,aboutamonthortwo,theyweresuccessful.Silverrosetoaround$60.Thenitcrashedtoaround$10,thepricewhereithadstoodwhentheHuntsstartedbuying.Anotherrecentexamplecamewhen,intheearly1990’s,the

UKgovernmenttriedtopropupthevalueofsterlingwithintheERMsystem.Forawhiletheymanagedthetrick.Thensterlingfellthroughthefloor,andwasforcedoutoftheERM.Hamiltonconcludedthat,eventhoughitmightbepossibletomanipulateindividualstocks,themarketiswaytoobigtobemanipulated.

TheMarketReflectsEverythingT hemarketaverages,suchastheDowJones,takeeverythingintoconsideration,allofthetime.ThevalueoftheDowJonesIndex,forexample,reflectsallinvestorsentiment–thehopes,fears,concerns,optimism,andpessimism–ofallitsparticipants.Thisincludesthe

listedcompanies,investors,speculators,andregulators.Italsoreflectseverythingelsethatisknownaboutamarketatanygivenmoment.Interestrates,andexpectationsforthemareknown.Currentbusinessclimateiswelldocumented,asarepredictionsforthefuture.Companyearnings,andexpectations,arealreadyinthemarketplace.Thepolitics

ofthedayandimpendingelectoralchangeisalreadypricedin.Shockstothemarket,unexpectedevents,wars,orpoliticalupheaval,mayoccur.Thesewillaffectthemarketintheshortterm,butthenitwillreturntotrend.

TheTheoryIsNotInfallibleUnlikemanytheoristswhendiscussingtheirowntheories,DowandHamiltoncametotheconclusionthattheDowTheoryisnotperfect.Infact,theyconcludedthatnotheorycouldbeperfect.Ifthereweresuchamarketbeatingtheory,thentheinvestorwhohaditwouldquicklybeatall

marketsandowneverything!WhatDowandHamiltonsay,however,isthattheDowTheorygivesinvestorsawaytotakeemotionoutoftrading,toidentifytheprimarytrend,andbetterevaluatebullishandbearishsignals.DowTheoryputsforwardthattherearethreetypesofpricemovement.Recognizingthesemovements,howthey

interactwitheachother,andthencomparingtotheprimarytrend,helpsatradertocatchthebigswings,thelargemarketmovesthatimproveinvestingprofitmanytimes.Thetwoacceptedtheneedtowatchthemarketsclosely,andnotedailyandweekly,evenmonthlypricefluctuations.Settingtheseagainsttheprimarytrendlets

aninvestorbetterpickentryandexitpoints.

Chapter3-UnderstandingMarketMovements

Therearethreetypesofpricemovement,eachwithitsspecificelementsandtimeframes.

PrimaryTrendTheprimarytrendisthebroad,underlyingmotionofthemarketoveranextendedperiod.Whenwetalkaboutbullandbearmarkets,wearereallytalkingabouttheprimarytrend.Thistrendwillremaininplaceuntil,well,untilitchanges!Therearefourseparatesignalsthatwillidentifythechangeofatrend.

Up-trendingandDown-trendingAnup-trendseesaseriesofhigherhighsandhigherlows.ThepeaksandtroughsoftheDowJones’smovementsoscillateinarhythmicincreasingpattern.Adowntrendseesaseriesofrhythmiclowerhighsandlowerlows.Thedowntrendisbrokenwhenalowisfollowedbya

higherhigh,ratherthanalowerhigh,andthenthenextlowisalsohigherthantheprevious.Thischangeoftrendisconfirmedwhenthenewhigherhighisbroken.Themarketmovementhasturnedpositive,andanewbullmarketisinplace.ConfirmingAveragesConfirmtheTrendWhenHamiltonproducedtheDowTheory,theRailroads

werethemaindriverofeconomicactivity.Transportinggoodsandservicestotradearoundtheworldwasconductedprimarilyoverthetracks.Hamiltoncontendedthatbeforeeconomicactivitycouldincrease,rawmaterialswouldhavetobetransported.So,hefeltthatanincreaseinrailactivitywouldbetheforebearofwidermarketactivity,andusedthe

RailroadIndexasaconfirmationaverage.Hetheorizedthatforanewtrendtobeconfirmed,itwouldhavetobeconfirmedbybothindices.Ifoneoftheindiceshitanewhighorlow,thentheotherwouldhavetoquicklyfollowsuitforthenewtrendtobeinplace,andtheDowTheorysignaltobevalid.Itissimilartoday.ManyDow

theoristsusetheAirlineIndustryasthepreferredconfirmationindex,airlineshavingreplacedrailroadsintransportationimportance.VolumeisKingHamiltonconsideredthatmarketvolumewasoneofthemostimportantdriversofprimarytrend.Inabullmarket,volumeshouldbeheavierontheadvances(thehigherhighs)thanthe

declines(thehigherlows).Theoppositeshouldholdforbearmarkets.However,highvolumescouldalsoindicatetheimpendingchangeoftrend(rememberthattheoriesaren’tinfallible).BreakoutfromaTradingRangeThemarketoftentravelssidewaysoveraseveralmonths.Thisperiodwouldeitherbeaperiodof

accumulation,followedbyabreaktotheupside,oraperiodofdistribution,followedbyabreaktothedownside.Whichitiscannotbeascertaineduntilthebreakisconfirmed.

SecondaryMovementTheseruncountertotheprimarytrend.Forexample,abeartrendingmarketmaybenefitfromarallyperiod,andabullmarketmaysufferabearcorrection.Thesereactionarymovementscanlastfromdaystomonths,buttendtobefasterandsharperthantheprecedingprimarytrend.Themovecanbe

anythingbetween33%to66%,with50%thetypicalmove.Attheendoftherallyorcorrection,itisusualtoseeaperiodofreflection.Marketvolumedrops,pricevolatilityfalls,andthemarketisconsidered‘dull’.Thistypeoftradingpatternaugursinaturnaroundtoprimarytrendagain.

DailyFluctuationsPricesofindividualstocksandmarketindiceswillfluctuateonalargerrelativebasisdaytodaythanwhenviewedoveralongtime.Toomuchcredencepaidtothesefluctuationscanleadtopoorinvestmentdecisions,andpossiblelosses.Atradershouldalwaysconsiderdailypricemovementsin

conjunctionwiththebiggerpicture.

Chapter4-The3StagesofBullandBearMarkets

Themarketmovesinaccordancewiththreestages,andbullandbearmarketsalsowillhavecountersecondarymovements.

BullMarketsStage1–Accumulation.Similarinnaturetothelastreactionaryrallyofabearmarket,pessimismstillreignssupreme,butstocksarenotwidelyheld,andthereforesoldinloweramounts.Corporatenewsisbad,andvaluationswilllikelybeathistoriclows.Atthisstage,stockshave

beguntofindabottomandlongterminvestorswillbelookingtobuyvalue.Afterthefirstrallypetersout,thebearsdeclarethebearmarkettostillbeinplace.Itiswhenthenextpeakisseenhigherthanthefirstthatthenewbullmarketisconfirmed,andinvestorsmovethemarkettostage2.Stage2–TheBigMoveThisstagelaststhelongestof

allthreestages,andmovesthemarketfurthestinvalue.Economicconditionsimprove,earningsrise,confidencereturns.Itiseasytomakemoneybyinvestingit.Stage3–ExcessSpeculationandexpectanceofeverincreasingassetpricestakeshold.Moneycan’tcomeintothemarketquickenough.Publicshareownershipis

high;thenumberofcompaniesgoingpublicincreases,asdoesmergerandacquisitionactivity.Valuationsareathistorichighs.Thisisthestagewheremostmarketbullslosemoney.

BearMarketsStage1–DistributionVolumesarelow,themarketsappearstotrendsideways.Smartmoneybeginstogetoutofstocks.Thepublictakeuptheslack,believingstockwillstillmoveforward.Mostanalystsandforecastersstillpredictgoodthingsforcompanies,stocks,andthewidermarket.Areactionrally

willfollowthefirstmoderatefall,andthiscouldbeswiftlystartedandfinished.Itisatthisstagethatalowerhighandthenabreakbelowthepreviouslowwillconfirmthenewbearmarket.Stage2-TheBigMoveThetrendisfirmlyinplace:businessconditionsworsen,companyprofitsfall,andstockpricesretreat.Analystscutestimates,andtheselloff

continues,draggingthemarketlower.Stage3–DespairSometimescalledcapitulation,investorsseenohopeforprofitsfrombeinglongofstocks.Thoughvaluationsarelow,investorsbelievethemarketwillstillheadlowerandshunstocks.Corporatenewsisbad,andthemarketwillcontinuetofalluntilallbadnewsis

pricedin.

Chapter5-TheBasisforTechnicalAnalysis

DowTheoryunderscoresthebasisformuchtechnicalanalysistoday.Ittakesintoconsiderationfundamentalsandemotions,andthenattemptstoallowthetraderorinvestortodiscoverlong-term

trendsandtakeadvantageoffluctuationswithinthosetrendsasthemarketandstocksmoverhythmicallyinsidetheprimarytrend.Fordaytraders,itisofrelativelylittleuseotherthantobeabletoidentifythebiggerpicturewithinwhichthedaytraderoperates.Itrequiresinvestorstoignoreassumptionsandestimates,andtoactaccordingtoknown

facts.Inconclusion,usingtheDowTheoryshouldbeanotherarrowtoaninvestor’sbow.Itisnotthebe-allandend-all(remember,thetheoryisn’tinfallible),butshouldbeconsideredasatooltoaddtotheothersavailabletous.AmodernphrasethatperhapssumsuptheDowTheoryisthis:MaketheTrendYourFriend.

UsetheDowTheorytohelpspotthattrend.

ConclusionThankyouagainfordownloadingthisbook!Youshouldnowhaveadeepunderstandingoftherhythmicmovementofthemarketsandhowtotakeadvantageofitforprofitabletradingandinvesting.Finally,ifyouenjoyedthis

book,pleasetakethetimetoshareyourthoughtsandpostareviewonAmazon.It’dbegreatlyappreciated!Thankyouandgoodluck!

Bonus:DownloadtheFreeTradingToolkitGetinstantaccesstofreecheatsheets,workbooksandguidestohelpyoubecomeaprofitabletraderor

investor.Asaspecialthanksfordownloadingthisbook,we'veputtogetheratoolkitofexclusiveresources,including…-Ourexclusiveebook:HowtoProtectYourTradingProfits-Downloadablecheatsheetsforprovenoptiontradingstrategies-Ourstep-by-stepguide

forusingademotradingaccounttomaximizeyourprofits-Plus,brand-newebooks,downloads,workbooks,cheatsheets,videosandmoreeachmonth

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www.zantrio.com/kindle