THE

DOW
THEORY
MORE THAN 100 YEARS
OF PRACTICAL GUIDANCE
TO STOCK INVESTORS
A Simplified explanation
of the Dow Theory based on
a study of the observations of
the late William Peter Hamilton,
long time editor of The Wall Street
Journal, and the late Robert Rhea,
noted proponent and practitioner.
More than 100 years of practical guidance
to stock investors

THE DOW THEORY

A simplified explanation of the Dow Theory

based on a study of the observations of the late
William Peter Hamilton, longtime editor of
The Wall Street Journal, and the late
Robert Rhea, noted proponent and practitioner.

7412 Calumet Avenue

Hammond, Indiana 46324-2692
www.DowTheory.com

© 2018 Horizon Publishing Company

FOREWORD

While most investors have heard of the Dow

Theory, few have more than a nodding acquaintance
with it. It is a method of forecasting the future trend
of the stock market from the action of the market
itself as revealed by the Dow Jones Industrial and
Transportation averages.

In this book you will find a discussion of the Dow

Theory in layman’s language. If you study it carefully
you will learn to look for information in the only
spot where all pertinent information is consolidated.
While this book will not by itself make you an
authority on the Dow Theory, it should help you
acquire a working knowledge. With all its limitations,
the Theory has proved one of the best methods yet
devised for forecasting the future of the stock market.

The market turned Bearish according to the Dow

Theory on April 9, 2018.

April 2018
Dow Theory Forecasts

Stock Market Guidance

For The Individual Investor
Since 1946
INTRODUCTION TO THE
DOW THEORY
More than a century of Dow Theory history
establishes the validity of these claims:

1. If you are in business, an understanding of the Theory will

dissolve many doubts and will greatly enhance your chances
of success.
2. If you hope to “make money in the market,” your chances
are slim indeed without a knowledge of Dow Theory principles.
3. If your problem is one of conserving property already
acquired, a working knowledge of the Theory is your safest
guard against catastrophe.
The Theory is based on the changes in price of the stocks
which are bought and sold every business day. Each share
of stock represents ownership of a definite fraction of some
business enterprise. The owner of each share of stock is virtually
a partner in that business. He may sever his connection with
the business on a moment’s notice by selling his stock. He
does not sell it to the company or to a stock exchange, but to
some other individual through a broker on the stock exchange
in the perpetual auction which the exchange conducts. Every
transaction in this auction consists of a sale and purchase. The
price at which every transaction is made is carefully recorded
and widely published.
Naturally, the prices at which transactions are made vary
from day to day, and thereby hangs our Theory.

The Dow Theory 1

BEGINNING OF THE
DOW THEORY
The continuous auction of stocks is conducted every business
day on the floor of the New York Stock Exchange and other
exchanges.
Stocks are “bid up” or “sold down” according to the public’s
estimate of the merit of each particular company. If the public’s
demand for a certain company’s stock is greater than the supply,
the price is bid up until the demand is satisfied. Conversely, if
more stock is offered than bid for, the price declines until the
pressures of supply and demand are again in balance.
Back in the early days of trading in securities it was assumed
that the shares of different companies fluctuated in price
independently of each other. Perhaps they did and surely they
still do to some extent. However, with the advent of organized
stock exchanges, the perfection of instant communication, rapid
transportation, and the widespread dissemination of news, a
novel element became discernible in price fluctuations.
It was in the late 1890s that a few market students, led by
Charles H. Dow, discovered that the stock market had a “trend,”
that the great body of stocks moved more or less in unison,
regardless of the price fluctuations in individual stocks. This
“trend” action led to the development of a “trend theory” and
ultimately to the Dow Theory.

2 The Dow Theory

THE TOOLS OF THE
DOW THEORY
Discovery that the stock market as a whole had an underlying
trend, distinct from the daily fluctuations of individual
stocks, led to the use of the Dow Jones averages. Creating
the averages presented many difficulties, such as the addition
of new companies to the list, the fact that some rarely traded,
and that some might be removed from the list. Beginning in
1897, however, Dow Jones & Co., the publishers of The Wall
Street Journal, devised two sets of averages which have been
continuously calculated and published ever since. The years
have seen the change of many names in the two lists used in
the computations, but for all practical purposes the two sets of
averages tell a continuing story.
The Transportation Average is based on the price of 20
representative transportation stocks at the final sale of that
stock on any given day or in any given hour. It is calculated by
adding together these closing prices and dividing by a divisor.
The 20 stocks used in the Transportation Average are:
Alaska Air Group Kansas City Southern
American Airlines Group Kirby
Avis Budget Group Landstar System
CH Robinson Worldwide Matson
CSX Norfolk Southern
Delta Air Lines Ryder System
Expeditors Int’l of WA Southwest Airlines
FedEx Union Pacific
J.B. Hunt Transport Services United Continental Holdings
JetBlue Airways United Parcel Service
The Industrial Average is made up of a broad group of 30
stocks. Originally it included stocks which are today classed as
utilities. (A separate Utility Average was instituted in 1929, but
so far has not found a place in the Dow Theory.) As with the
Transportation Average, it is necessary to divide the sum of the

The Dow Theory 3

prices of the averages’ stocks to find the official average. The
divisor is the result of a succession of substitutions, deletions,
and consolidations in the original list of industrial stocks.
This also applies, of course, to the transportation divisor. Both
divisors are adjusted when necessary to assure a continuous
and uniform record.

The 30 stocks used in the Industrial Average are:

3M Johnson & Johnson
American Express J.P. Morgan Chase
Apple McDonald’s
Boeing Merck
Caterpillar Microsoft
Chevron Nike
Cisco Systems Pfizer
Coca-Cola Procter & Gamble
Disney Travelers
DowDuPont United Technologies
Exxon Mobil UnitedHealth Group
Goldman Sachs Verizon Communications
Home Depot Visa
IBM Walgreens Boots Alliance
Intel Wal-Mart Stores

These two averages — Transportation and Industrial — are

the tools with which you may undertake to apply the Dow
Theory. They are published daily on the financial pages of
leading papers so that you need not work out the calculation
yourself. Some able interpreters of the Theory include a third
tool, i.e., the volume of sales each day. In this discussion we
shall accept the teaching of the original Dow Theory authority,
William Peter Hamilton, early editor of The Wall Street Journal,
and regard volume of sales as incidental in importance.

4 The Dow Theory

DOW THEORY WORKBENCH
The Dow Theory uses two tools:
1. Daily closing Dow Jones Transportation Average.
2. Daily closing Dow Jones Industrial Average.
To use the tools advantageously we need a workbench, or
chart. The further the chart reaches back into financial history,
the better for our purposes, because we are going to make
an effort to recognize, and, finally, to anticipate recurring
characteristics in the story of the averages.
Our chart is divided into intervals of one day and our chart
lines run from the closing average one day to the closing average
the next day. The following chart shows the Dow Industrials and
Dow Transports from January 25, 2018 to June 25, 2018. These
charts provide a good picture for viewing market movements
as they relate to the Dow Theory.

The Dow Theory 5

PRACTICE CHART
Daily fluctuations for five months
January 25, 2018 through June 25, 2018

DOW INDUSTRIALS

26,000

25,000

24,000

Jan Feb Mar Apr May Jun

DOW TRANSPORTS

10,850

10,500

10,150

Jan Feb Mar Apr May Jun

6 The Dow Theory

THE THREE MOVEMENTS
We have seen that the market as a whole has a trend and that
this trend is conveniently measured in terms of two sets of Dow
Jones averages, Transports and Industrials. We are now going
to examine the movement of these averages, confident that
what is true of them is true of the great body of listed stocks.
Dow Theory has for one of its fundamental concepts the
existence of not one, but three movements of the Averages.
They are known as:
1. Primary trend.
2. Secondary reaction.
3. Daily fluctuations.
The distinguished theorists who developed the Dow
principles compared these three movements to the action of
the ocean as seen from a sandy beach.
First, the primary trend is the tide, relentless and all-engulfing,
which goes through its movements over a comparatively long
space of time with no regard for waves or ripples. The rising
tide is the bull market and the falling tide the bear market.
Next, the secondary reactions are the waves that sometimes
sweep far up the beach in apparent contradiction of an ebbing
tide or fall back in a trough in defiance of a rising tide. These
secondary reactions, waves and troughs, develop swiftly. Often
they are difficult to distinguish from a turn in the tide. In fact,
a wave or trough occurring at the time of a change in direction
of the tide will later prove to have been a part of the tide itself.
Third, the daily fluctuations are the ripples and splashes on
the surface. Individually unimportant, these daily fluctuations
are a part of the water action, which, considered altogether,
constitute the tide.
The Dow Theory is mainly concerned with the movement
of that tide, which we call the primary trend.

The Dow Theory 7

DAILY FLUCTUATIONS
The smallest unit of time considered in the Theory is one day.
Only the closing averages are used in the Theory. This use of
closing averages alone presents the true picture because floor
traders and specialists may take long or short positions during
any day, but they habitually even up before the close.
A single daily fluctuation is a unit belonging to the third
movement of the averages (ripples and splashes on the surface).
It is one day’s movement (the change from close to close) and
disregards entirely the turmoil within the day.
Daily fluctuations, put together end to end on our chart, form
our pattern and give us our Dow Theory signals.
In passing it is worth noting that the daily fluctuation is the
only part of our whole tidal movement that can be affected
by market manipulation. Manipulation can have no lasting
influence on a market so big and so broad.
TIDAL ACTION
If we accept the definition of a bear market as a long
downward movement of the Averages interrupted by rallies,
we find that there have been 31 bear markets since 1899. In
spite of the recurring phenomena of bear markets, the financial
community and the public seem invariably to be taken by
surprise and to refuse for an indefinite period to believe the
evidence of the averages. The American people do not like
pessimists, or bears. One of the advantages of being a Dow
Theorist is that a rational general pessimism can produce great
personal optimism.
The record establishes that in the more than 100 years during
which the averages have been available for study, the market
has always had a trend either up or down.
Granting the existence of trends, let us return again to our
analogy of the tide. We come to the seashore and want to
know which way the tide is moving. Is it rising? Is it ebbing?
Approximately what part of its whole movement has it

8 The Dow Theory

completed? Our market tide, however, has no such regularity
of timing as the tide of the sea. The old salts who loiter around
this beach are full only of information about the ripples and
the spray, and this they would like to sell or even give away.
Let’s drive some stakes in the sand, where the waves slide up
the beach, and see for ourselves which way the tide is moving.
One or two waves and one or two stakes won’t be enough, so
we will have to prepare a chart with all the waves stake-marked
for many months or even years.

The Dow Theory 9

THE AVERAGES SPEAK
These preparations we make to chart the movement of the
averages enable us to read what these averages are saying. A
fundamental Dow principle is that the averages “see all and
know all” of financial importance. There is an exception:
Averages cannot anticipate events commonly known as “acts of
God,” but even such events are quickly appraised and evaluated
by the action of the averages.
Reflect for a moment on the proposition that at any given
time the averages represent all that is known and all that can be
foreseen by financial and lay minds concerning financial matters.
The averages accurately reflect the tapping of every source of
important information that has any market significance. As far as
it is humanly possible, they offer a glimpse of the future. Insiders
may see an impending turn in the affairs of their companies.
They buy or sell. Their friends get the word. They buy or sell.
Thousands of bright minds make a business of delving into
figures, comparisons, patent news, weather reports, potential
wars, and every other bit of information of possible market
significance. What these bright minds discover results in stock
buying or selling long before such knowledge becomes public.
The averages gauge the influence of politics on business.
For example, a business owner may operate the business as an
instrument:
1. To make profit for the owner.
2. To serve the public.
3. To give employment.
Meanwhile, whatever administration is in power in
Washington may regard the same business as an instrument:
1. To produce tax revenue.
2. To give employment.
3. To serve the public.
4. To profit the owner.
The averages weigh, appraise and even anticipate the
victories and defeats of this conflict.

10 The Dow Theory

DOW THEORY CONFIRMATION
We now come to a fundamental tenet of the Dow Theory:
for any signal to be authentic, it must be affirmed by both the
Industrial and Transportation averages. While this concept
may seem a little confusing at first, we have only to return to
our analogy of the movement of the tide to clear it up. Instead
of watching a single beach (or chart), we now must imagine
ourselves standing at the mainland end of a narrow peninsula
from which we can watch two beaches: Both are parts of the
same ocean (market), divided into two parts (Industrial Average
and Transportation Average) by the peninsula. While both
beaches are subject to the same tidal action they may show
varying wave action. The wave action on one beach may often
prove highly deceptive as to the course of the tide unless we find
the movement confirmed by similar action on the other beach.
Over the years during which the averages have been
observed and recorded, this confirmation by both averages has
established itself as an essential part of the Theory.
The confirmation that carries authority need not develop
in our chart on the same day or even in the same week. It is
deemed sufficient if one average follows the other into new low
ground, or new high ground, before the first average retracts
its half of the signal. The first average retracts if it makes a
new extreme in the opposite direction before confirmation by
the second average.
Remember that the Dow Theory is based primarily on
experience, and that experience has demonstrated the necessity
for confirmation. Some chartists attempt to make forecasts from
the action of the Industrial Average alone. However, no system
of forecasting yet devised has approached the Dow Theory as
an aid to successful investment over a period of years.

The Dow Theory 11

BULL MARKET
It is all very well to say that the Dow Theory is no more than
a method of applying common sense to the stock market. But
individual investors, engrossed in their own affairs, probably
haven't time to study stock-market history and learn what the
record has to tell about trends.
Investors may apply common sense to the selection of
an investment by examining the statements of a number of
reputable companies. They may check their own estimate of
values by searching the financial press and making use of one
of the established statistical services. And when an investor has
done all this, he may make his investment in the best stock in
the world just in time to suffer a devastating loss.
In 1929, United States Steel common stock was generally
regarded as a safe conservative investment at a price above $260
a share and with a dividend of $8 a year. In less than three years,
United States Steel common crashed to a price below $22 a
share. No dividends at all were paid for four years.
When considering the purchase of any seasoned common
stock, the most important thing to know about it is when to buy it.
No trifling matter is this trend or tidal action we are attempting
to gauge and understand. The big incoming tide which started
in the summer of 1970, with the Industrial Average at 631.16,
surged on for almost 31 months and pushed the average to
1051.70. The ensuing bear market ran for almost two years
before reaching a low of 577.60.
In the more than 100 years during which the averages have
been recorded, there have been 31 clearly defined rising tides
or bull markets, one of which had just begun at the time of
publication. The average length of the 31 completed bull markets
was approximately 34 months.
We may define a primary bull market as a long, broad, upward
movement of prices, which is interrupted at uncertain intervals
by important reactions.

12 The Dow Theory

A typical bull market, for clarity reduced to a single line,
would look something like the chart below:
E
D

➙
R

➚
R
C
➙

A B
➘

X R

X. Bear market low.

A. Top of a long, slow rally.
R. Secondary reactions.
B. Point where Dow theorists should recognize coming
bull market. (A second clearly defined wave which goes
above A.)
C. End of first phase.
D. End of second phase.
E. Peak of bull market.
FIRST PHASE
How can Dow theorists recognize the beginning of a new
bull market?
First, by the pattern of the averages. They will expect to see a
period of weeks, and perhaps even several months, during which
the averages make a succession of small movements. These
viewed all together form a sawtooth pattern with rallies making
successively higher tops while successive declines fail to penetrate
previous lows. This pattern will normally be accompanied by
small volume.
Second, Dow theorists will expect the press, business
associates, and friends to sing the blues in alarming fashion.

The Dow Theory 13

They will expect to learn of omitted dividends and of important
companies in financial difficulties. The fair-weather economists
who are nearly always bullish will finally turn bearish, and
general pessimism will fill the air. The things foreseen by the
preceding bear market will take place.
But observe now, with all this gloom and suffering, the
averages are refusing to retreat further. They have thoroughly
discounted the worst.
Third, some time from a new high spot in our sawtooth pattern,
a trough will develop which may spoil the semi-regularity of our
sawtooth pattern but will stop short of the lowest point. From
here another rise will develop, carrying both averages above the
previous high point. This second clearly defined wave, carrying
both averages to new highs, should complete the evidence of a
turn in the tide to a new bull market.
A characteristic often present in this period is that few people
seem to have either the means or the desire to buy, and small
investors who cushioned the previous bear market with premature
purchases are apt to begin selling their stocks just in time to miss
the big rise ahead.
Patience is required to avoid buying too soon, but courage is
required when the unmistakable signal arrives.
This first phase of a bull market represents a return to sanity
on the part of a large mass of investors. True, not many seem
prepared or courageous enough to buy, and the upturn proceeds
in small volume.
Dow theorists will expect variations from the routine described
above because each new bull market encounters a new set of
conditions. The actual turn in the tide, however, should loom
unmistakably clear to the patient keeper of a chart.

SECOND PHASE
The second phase of a bull market might be called its normal
phase. During this phase, often the longest of the market,
prices adjust and readjust themselves to improving business and

14 The Dow Theory

increased earnings. At this time investors can put a knowledge
of individual company statistics to important use. Dow theorists,
confident of the trend, can press home this advantage by judicious
selection of individual stocks. They may choose to add to holdings
from time to time as the second phase progresses. Of course, even
in a primary bull market, not every day is a bull day. However,
there will be few surprises for Dow theorists, as they know the
nature and characteristics of secondary reactions, which we shall
examine a little later.
FINAL PHASE
The third and final phase of a bull market has some
distinguishing characteristics of its own. Dow theorists may be
right too soon. They may recognize the third and dangerous phase
and, as a consequence of early recognition, too quickly take money
off the table.
The third phase may have a long life, punctuated by frequent
sharp reversals. The Dow theorist will watch the recovery from
each reversal to see if both averages regain the lost ground and
confirm each other at new highs. If they do, the bull market is
still on. Successive new highs by both averages, however, must
be examined in the light of common sense. These confirmed new
highs have diminishing authority when the bull market is in its
final phase.
The time will come when a market shakeout, with the early
appearance of an ordinary reversal, will fail to be followed by
the expected rebound to new confirmed highs. Instead, with
diminishing volume, one or both averages will fall short of the
previous highs.
The conclusive signal that the tide is turning, however, will
appear when a fresh correction carries both averages below the
lowest point of the preceding shakeout.
Near the climax of a bull market, you may witness extreme
optimism on the part of professional statisticians and soothsayers,
general bullishness on the part of newspapers and the public. The
Dow theorist will remember that bear markets begin in good
times, when the far-seeing eyes of the averages detect trouble on
the distant horizon.

The Dow Theory 15

REVERSALS
“Secondary reaction” is the time-honored Dow Theory
expression for an important decline in a primary bull market or
an important rally in a bear market. The word “reversal” is more
commonly used.
Reversals have always occurred and should not surprise us.
We will examine them in the light of the past and know, more
or less, what to expect.
A reversal comes swiftly and without warning out of a clear
sky. As Dow theorists, we have no way of knowing when one
will strike, but we do know to expect them at irregular intervals.
When a reversal comes, it may continue for as short a period as
a week or as long as several months. It may retrace percentage-
wise perhaps one-third to two-thirds of the movement since the
end of the last previous reversal.
Reversals tend to occur at a speed much greater than that of
the primary trend. The reversal regularly occupies less time than
the preceding primary movement.
The apex of the reversal will probably be accompanied by
heavy volume and followed by our familiar sawtooth pattern
with diminishing volume on each minor move against the
primary trend.
CAUSES OF REVERSALS
A reversal is regularly caused by conditions within the market
itself. In a bull market, such conditions might include too much
speed in the advance, too many inadequately protected margin
accounts, an excessive volume of loans to brokers, and the like.
In a bear market, such conditions might be an oversold market
or overextended short interest. Any important piece of news may
serve as the spark to touch off a reversal.
To complete their diagnosis of a reversal, Dow theorists will
remind themselves that fundamental conditions making for a big
primary movement do not change overnight. If there has been no
fundamental change in general business, then this rapid sell-off

16 The Dow Theory

(or advance), which looks only like a reversal, must be only a
reversal and not a turn of the tide.
Distinguishing a reversal from an actual turn of the tide
presents a delicate problem. On the chart, as on the beach,
no one can know that a new wave will sweep higher or a new
trough recede lower. But a clue remains: Once the final phase
of either a bull market or a bear market is recognized, then any
apparent reversal must be regarded with suspicion, for it may
prove to be the actual turn of the tide.
Reversals, properly known to Dow theorists as secondary
reactions, can deceive. They have proved the despair of high-
priced experts and the ruin of amateur dabblers. If they perplex
you, return again to the analogy of the waves on the beach,
which may be described and defined but seldom accurately
anticipated.
No line of demarcation distinguishes a reversal (secondary
movement) from the minor trend (daily fluctuation). A series
of daily fluctuations that retraces as much as a third of the
preceding primary movement would constitute a reversal.
Authorities differ in defining lesser movements as reversals or
as parts of the minor trend. Experience will gradually enable
the new Dow theorist to ignore meaningless rallies and declines
and to recognize the important reversal.
With the whole picture of the tide and the waves and troughs
in mind, the Dow theorist will learn to identify each condition.
Of course, if this were perfectly easy to do, we’d have so much
company in the Theory business that we couldn’t use it at all.

The Dow Theory 17

PENDULUM SWINGS
Dow theorists should understand a principle sometimes
called “Dow’s Law of Action and Reaction.” A primary
movement in the market is often followed by a movement in
the opposite direction (reversal) amounting to at least one-third
of the primary movement. The principle seems to persist for
long, uninterrupted advances or declines no matter how far
they may go. It also operates in the shorter swings of the daily
fluctuations.
We have already examined the long primary swings of this
pendulum and its corrective backswings or reversals and have
likened this action to the movements of the sea. We have passed
over and found unimportant a similar pendulum movement in
the daily fluctuations. At the same time we must understand the
fact that within the broad action and reaction of the pendulum,
the shorter action and reaction of the minor movements continue.
Dow thought a safe rule to follow was to expect at least a
three-eighths correction of every primary movement.
On our chart, of course, this movement of pendulum within
pendulum produces a highly irregular pattern that must not
divert us from staking out succeeding new highs and lows and
embracing as our working model our original analogy of the
tide.

18 The Dow Theory

BEAR MARKET
FIRST PHASE
As in bull markets, Dow theorists will often recognize three
phases in a bear market. We may define a primary bear market
as the long, broad, downward movement of prices interrupted
at irregular intervals by important reversals (rallies in this
case). The bear market is caused by various disorders in the
world that are damaging to business. Strangely enough, a bear
market seems to persist until prices discount the very worst
that may happen.
Dow theorists, fully aware of the recurrence of bear markets,
will look for signs long before the completion of the primary
bull market. They will realize that any reversal in the final phase
of a bull market may mark the beginning of the long downward
movement. They will suspect the bear’s arrival when a seeming
reversal in a bull market fails to be followed by a movement
into new high ground. They will know the bear market has
arrived when a second trough breaks through the low points
established by the earlier trough. This first phase represents
the surrender of “get-rich-quick” hopes by late participants in
the bull market.

SECOND PHASE
The second phase of a bear market often develops into a long,
drawn-out affair. It will be punctuated at uncertain intervals by
sharp reversals that may last from a week to several months, and
which will recover a substantial part of the previous downturn.
The record shows a wide range of recoveries, averaging 40%.
This second phase of a bear market often features such
phenomena as recessions in most lines of business, decreased
earnings of many companies, and assurances by so-called
experts that bargain day is at hand.

The Dow Theory 19

THIRD PHASE
Not all bear markets develop a distinct third phase.
Nevertheless, the Dow theorist will be prepared for a final,
crushing slide and the collapse of prices to a point that seems
unbelievable. During this period, people who have seen their
regular sources of income diminish to the vanishing point may
sell stocks in order to obtain funds for living expenses.
Good stocks shrivel with the bad ones just because they
can be sold. Statistical services often ignore this condition in
making investment recommendations, but the all-seeing eyes
of the averages consider this vital technical detail along with
all other pertinent facts.
Dow theorists will not expect to buy into the absolute low of
a bear market. In fact, the averages will not reveal to them that
the bear market is over until the lows have passed. They will
look for signs of the bear market end only after panicky selling
has ceased and days of quiet markets ensue. They will not be
tempted by sudden upturns to believe that the bear market has
changed to a bull market in a day. The maladjustments that
produce a bear market will not be cured overnight.
Small volume, the refusal of the averages to retreat in the
face of bad news, and an all-pervading pessimism will make
the Dow theorist alert for the signal that marks the coming of
a new bull market.

20 The Dow Theory

TIME ELEMENTS
IN PRIMARY TRENDS
Perhaps the hardest thing for the new Dow theorist will be
the exercise of patience. Let him remember that he invests his
money in competition with some very smart buyers. Almost
every tick on the tape represents someone’s thoughtful decision.
If investors pay attention, they can read these composite
thoughts in time to gain a share of the profit. They must not
try to gain it all by attempting to buy at the absolute bottom.
Prices do not make their moves in response to the number
of people buying or selling, but in response to the weight of
dollars on the buying side and the pressure of stocks on the
selling side. We watch the averages to discern the majority
opinion of money, not people.
Patience is required in successful trading based on this
majority money opinion. Let’s look at the duration of the
generally recognized primary tides since 1896.

THIRTY-ONE PRIMARY BULL MARKETS

Bull market which began in 1896 lasted approximately 33 months.
" " " " " 1900 " " 28 "
" " " " " 1903 " " 27 "
" " " " " 1907 " " 25 "
" " " " " 1910 " " 28 "
" " " " " 1914 " " 24 "
" " " " " 1917 " " 24 "
" " " " " 1921 " " 15 "
" " " " " 1923 " " 62 "
" " " " " 1932 " " 57 "
" " " " " 1938 " " 11 "
" " " " " 1939 " " 06 "
" " " " " 1942 " " 49 "
" " " " " 1947 " " 15 "
" " " " " 1949 " " 42 "

The Dow Theory 21

Bull market which began in 1953 lasted approximately 31 months.
" " " " " 1957 " " 21 "
" " " " " 1960 " " 15 "
" " " " " 1962 " " 45 "
" " " " " 1966 " " 29 "
" " " " " 1970 " " 31 "
" " " " " 1974 " " 31 "
" " " " " 1978 " " 22 "
" " " " " 1982 " " 60 "
" " " " " 1987 " " 32 "
" " " " " 1990 " " 120 "
" " " " " 2003 " " 54 "
" " " " " 2009 " " 25 "
" " " " " 2011 " " 45 "
" " " " " 2015 " " 3 "
" " " " " 2016 " " 18 "

Bull markets — average length approximately 33 months.

THIRTY-ONE PRIMARY BEAR MARKETS

Bear market which began in 1899 lasted approximately  15 months.
" " " " " 1902 " " 15 "
" " " " " 1906 " " 11 "
" " " " " 1909 " " 09 "
" " " " " 1912 " " 27 "
" " " " " 1916 " " 14 "
" " " " " 1919 " " 22 "
" " " " " 1922 " " 11 "
" " " " " 1929 " " 35 "
" " " " " 1937 " " 13 "
" " " " " 1939 " " 04 "
" " " " " 1939 " " 34 "
" " " " " 1946 " " 12 "
" " " " " 1948 " " 12 "
" " " " " 1953 " " 09 "

22 The Dow Theory

Bear market which began in 1956 lasted approximately020 months
" " " " " 1959 " " 15 "
" " " " " 1961 " " 07 "
" " " " " 1966 " " 9 "
" " " " " 1969 " " 18 "
" " " " " 1973 " " 24 "
" " " " " 1976 " " 17 "
" " " " " 1981 " " 15 "
" " " " " 1987 " " 04 "
" " " " " 1990 " " 04 "
" " " " " 2000 " " 34 "
" " " " " 2007 " " 17 "
" " " " " 2011 " " 4 "
" " " " " 2015 " " 2 "
" " " " " 2016 " " 9 "

" " " " " 2018 " " N.C.* "

Bear markets — average length approximately 15 months.

* N.C. — Not completed at time of printing.

LINES
Dow theorists should be on the lookout for an occasional
chart formation known as a “line.” Lines occur when the
averages move sideways, with variations of just 2% to 3% in
either direction over a period of several weeks.
A line once formed affords opportunity for one of our
most reliable signals. Abandonment of the line by both
averages, either upward together or downward together,
regularly indicates an important move in the direction of
the breakthrough. A break through the line by one average,
unconfirmed by the other, does not constitute a signal or justify
the Dow theorist in reaching a conclusion to act.

The Dow Theory 23

SIGNAL PRACTICE
If you now have a clear conception of the averages and Dow
Theory tidal action, you hold the key to success in your own
business and fortune in investing.
The averages don’t talk all the time. But when they do talk,
believe them. When they say something, that something stands
until they say something else. If, now and then, they seem to
lead you astray, the fault probably lies in your understanding,
and you must listen again and correct your interpretation.
Remember, the averages are the sum of all information
having any market influence. They represent the majority
money opinion. Over the years Dow theorists have discovered
certain recurring characteristics of movement and try to use
this experience to reap profits.
By way of review, let’s read a cycle of hypothetical signals,
which we shall invent for practice, beginning at the bottom of
a bear market:

B D

Ind. A D
B C
Tran. A
C

A to B – Protracted period of dullness late in second or

third phase of a bear market, ending in substantial rally.
B to C – Sell-off to C that fails to penetrate A.
C to D – Rally from C that goes above B.

The averages say: “Bear market ended at A. Primary bull

market has begun.”

24 The Dow Theory

B
A
B
Ind. A

Tran.

A and B are new highs for Industrials and Transports

(confirming each other) in a bull market.
The averages say: “We, the averages, reaffirm the bull
signal already given and predict that prices will move
indefinitely higher.”

A
B
Ind.
C B
Tran.
C

A to B – Sharp break after protracted advance, more rapid

than the primary movement. Shorter duration of time A to B
than C to A. Big volume at B.
The averages say: “We are only in a reversal in a bull market.
Good chance for you to buy when dullness ensues after B.”

Ind.

Tran.

Successive new confirmed highs in a protracted bull

market with frequent violent reversals between them.
Everybody is optimistic.
The averages say: “This is the big bull market we saw
coming. It’s still here and may go a lot farther. However, now
is no time to get careless, as everybody else seems to be.”

The Dow Theory 25

Ind.

Tran.

More successive new highs by one average which the other

average fails to confirm.
The averages say: “Well, we’re not quite so confident now.
Maybe you’d better raise your cash position.”

Ind.

Tran.

Successive lower tops and bottoms by both Averages, but

minor in extent.
The averages say: “This is beginning to look suspicious.
However, bull markets don’t end overnight, and prices may
turn up again. Get out of debt anyhow.”

Ind. A C
B
Tran.
A
C

Bottom of apparent reversal at A. Following rally B fails

to go to new highs. Both averages break through A in big
volume at C.
The averages say: “Bear market is here. Pay no attention
to economists and tipsters. They say business is good. Never
mind that, we see trouble ahead.”

26 The Dow Theory

Ind.
A

Tran. B C
A
C
B

Sharp upturn B to C after protracted down slide, more

rapid than primary movement. Shorter duration of time
B to C than A to B.
The averages say: “We are in a reversal in a bear market.
Don’t get too excited.”

The Dow Theory 27

CONCLUSION
Few investors are wholehearted, practicing Dow theorists; few
investors base their transactions on the story of the averages alone,
regardless of the action of the crowd and the ballyhoo of tipsters.
When a great bear market rolls in periodically, sometimes the
injured will complain that the Dow Theory caused it. Somewhere
they have heard that the Dow Theory (as usual) has been right
and that the selling of Dow theorists has caused the downturn.
Don’t be fooled. Even if you consider the casual Dow theorists
as well as the purists, these investors don’t control enough of
the market’s volume to do more than briefly influence the minor
trend of daily fluctuations.
******
The knowledge that the Dow Theory works and that it has
demonstrated its usefulness again and again over more than 100
years should warrant your continuing the chart and profiting from
its implications.
You have accomplished something when you have a clear idea
of the following points:
1. The averages express the sum of all pertinent information.
2. The market as a whole has a trend.
3. The trend is interrupted by reversals.
4. A signal is made only when one average confirms the
movement of another.
5. A signal, once given, remains in force until a countersignal
is given.
6. Signals made in third phases have diminishing authority.
7. Manipulation and short-selling have no lasting influence on
the trend.
8. Conditions that bring about bull markets and bear markets
change slowly.
9. No outside influence should interfere with your strict
reading of the averages, but you should consider attendant
phenomena in context. 6/18
28 The Dow Theory
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