Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world.
Dow Theory
Three Movements
Market has a tendency to fluctuate. Markets fluctuate in more than one time frame at the same time:
There are three well defined movements in market which fit into each other.
The first is the daily variation due to local causes and the balance of buying and selling at that particular time (Ripple).
The secondary movement covers a period ranging from days to weeks, averaging probably between six to eight weeks (Wave).
The third move is the great swing covering anything from months to years, averaging between 6 to 48 months. (Tide).
Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.
Various cycles have subsequently been identified within these broad categories.
