Measuring Implications of Triangles

We have stated (in Chapter 6) a minimum measuring rule to apply to price
movements developing from a Head-and-Shoulders Formation, and we can lay down a somewhat similar rule for Triangles — one that applies to both
the Symmetrical and the Right Angle species. The method of deriving the
Triangle formula is not easy to explain in words, but the reader can familiarize himself with it quickly by studying its application on several of the actual
examples which illustrate this chapter. Assuming that we are dealing with
an up-movement (upside breakout), draw from the Top of the first rally that initiated the pattern (in other words, from its upper left-hand corner) a line
parallel to the Bottom boundary. This line will slope up away from the
pattern to the right. Prices may be expected to climb until they reach this
line. Also, as a rule, they will climb, following their breakout from the
pattern, at about the same angle or rate as characterized their trend prior to
their entering the pattern. This principle permits us to arrive at an approximate
time and level for them to attain the measuring line. The same rules
apply (but measuring down, of course, from the lower left corner) to a
descending move.
Although application of the above formula does afford a fair estimate
of the extent of move to be expected from a Triangle, it is neither as definite nor as reliable as the Head-and-Shoulders formula. Do not forget the important
qualification that the Triangle has somehow lost a part of its potential
strength if the breakout is delayed until prices are crowded into the apex.

Descending Triangles

Descending Triangles have a horizontal lower boundary or Demand Line
and a down-sloping upper boundary or Supply Line. It is evident that they
are created by market conditions just the reverse of those responsible for the
Ascending Pattern. Their implications are equally strong and their failures
equally rare. Development of a Descending Formation hinges upon a campaign
by a group or syndicate (often an investment trust) to acquire a large
block of shares in a certain company at a predetermined price below the
market. Their orders are placed and allowed to stand until executed at that
level. If the successive rallies therefrom, which their buying generates, are
stifled by new supplies of stock for sale at lower and lower levels (thus
creating the typical Descending picture on the chart), orders to buy are eventually all filled and quotations break through and on down. The mere
breaking of the critical line, which many traders have seen function as a
support under the market for a more or less extended period, often shakes
the confidence of holders who had not previously considered selling. Their
offerings now come on the market and accelerate the decline.

The Right-Angle Triangles

We mentioned Ascending Triangles in the preceding paragraph. The Ascending
and Descending are the Bullish and Bearish manifestations, respectively,
of our next class of patterns, the Right-Angle Triangles. In many respects, in most in fact, they perform like their Symmetrical cousins, but with this very
gratifying difference: they give advance notice of their intentions. Hence,
their names, for the supposition always is that prices will ascend out of the
Ascending form and descend from the Descending form.
The Symmetrical Triangles, as we have seen, are constructed of a series
of successively narrower price fluctuations which can be approximately
bounded across their Tops by a down-sloping line and across their Bottoms
by an up-sloping line. Right-Angle Triangles are distinguished by the fact
that one of their boundaries is practically horizontal, while the other slants
toward it. If the top line is horizontal and the bottom line slopes up to meet Ascending persuasion. If the bottom line is horizontal and the top line slopes
down, the Triangle is Descending.
These formations are perfectly logical and easy to explain. The Ascending
Triangle, for instance, pictures in the simplest and most normal form
what happens when a growing demand for a certain stock meets a large
block of shares for sale at a fixed price. If the demand continues, the supply
being distributed at that price will eventually be entirely absorbed by new
owners looking for still higher levels, and prices will then advance rapidly.
A typical Ascending Pattern starts to develop in much the same way as the
“ideal” Symmetrical Triangle previously described, with an advance in our
certain stock from 20 to 40 where sufficient supply suddenly appears on the
market to fill the orders of all buyers and produce a reaction. Sensing the
temporary satiation of demand, some owners may dump their holdings on
the decline, but offerings are soon exhausted as prices drop back to, say, 34,
and renewed demand then stimulates a new rally. This runs into supply
again at 40, and again, all buyers are accommodated at that level. The second
recession, however, carries quotation down only to 36 before another upmove
develops. But the pool or inside group that is distributing at 40 still
has some of its holdings left to sell, so it may take more time, another backing
away and another attack at the 40 line, before the supply there is exhausted
and the trend can push along up.

How Prices Break Out of a Symmetrical Triangle

Prices may move out of a Symmetrical Triangle either up or down. There is
seldom, if ever, as we have said above, any clue as to direction until the
move has actually started, i.e., until prices have broken out of their triangular
“area of doubt” in decisive fashion. In a very general way, the precepts we
have laid down for breakouts from Head-and-Shoulders Formations apply
here as well. For example, the margin by which prices should close beyond
the pattern lines is the same, roughly 3%. It is equally essential that an upside
break in prices be confirmed by a marked increase in trading volume; lacking
volume, do not trust the price achievement. But a downside breakout, again
as in the case of the Head-and-Shoulders, does not require confirmation by
a pickup in activity. As a matter of record, volume does visibly increase in after prices have fallen below the level of the last preceding Minor Bottom
within the Triangle, which, as you can see, may be several points lower than
the boundary line at the place (date) of the actual breakout.
The curious fact is that a downside breakout from a Symmetrical Triangle
which is attended right from the start by conspicuously heavy volume is
much more apt to be a false signal rather than the start of a genuine downtrend
that will be worth following. This is particularly true if the break occurs
after prices have worked their way well out into the apex of the Triangle; a
high volume crack then frequently — we might even say usually — develops
into a 2- or 3-day “shakeout” which quickly reverses itself and is followed
by a genuine move in the up direction. All of the above the reader will have undoubtedly found most disconcerting.
Here is a very pretty technical pattern and it cannot always be
trusted. Unfortunately, Symmetrical Triangles are subject to false moves to a
far greater extent than the Head-and-Shoulders or any of the other formations
we have discussed or will discuss later. Unfortunately, some of these
false moves cannot be identified as such until after a commitment has been
risked (although good trading tactics should prevent their occasioning much

more than a trivial loss). And, unfortunately again, even a typical shakeout,
such as we described in the preceding paragraph, may produce a double
cross, proceeding right on down in a genuine decline. No technical chart
formation is 100% reliable, and, of all, our present subject is the worst
offender.
But most Symmetrical Triangles — lacking an actual statistical count,
our experience would suggest more than two thirds of them — behave
themselves properly, produce no false signals which cannot be spotted before
any damage is done. Upside breakouts on high volume may be premature
in the sense that prices return to pattern and do some more “work” there
before the genuine uptrend gets under way, but they seldom are false. We
shall have a little more to say about false signals in this chapter and more
later on what we trust will be helpful in developing the experience a trader
needs to defend himself against them.

Some Cautions About Symmetrical Triangles

A compact, clean-cut Triangle is a fascinating picture, but it has its tricky
features. The beginner in technical chart analysis is quite naturally prone to
look for Triangles constantly, and will often think he has detected them when,
in fact, something entirely different is in the process of development. Remember
that it takes two points to determine a line. The top boundary line of a
price area cannot be drawn until two Minor Trend Tops have been definitely
established, which means that prices must have moved up to and then down
away from both far enough to leave the two peaks standing out clear and
clean on the chart. A bottom boundary line, by the same token, cannot be
drawn until two Minor Trend Bottoms have been definitely established.
Therefore, before you can conclude that a Symmetrical Triangle is building, you must be able to see four Reversals of Minor Trend. If it comes after an
advance in prices, you must have first a Top, next a Bottom, next a second
Top lower than the first, and finally a second Bottom higher than the first
Bottom (and prices must move up away from the second Bottom before you
can be sure it is a Bottom). Then, and only then, can you draw your boundary
lines and proceed on the assumption that you have a Symmetrical Triangle.
Another point to remember — and one which does not conform at all
to the “coil” simile — is that the farther out into the apex of the Triangle
prices push without bursting its boundaries, the less force or power the
pattern seems to have. Instead of building up more pressure, it begins to
lose its efficacy after a certain stage. The best moves (up or down) seem to
ensue when prices break out decisively at a point somewhere between half
and three quarters of the horizontal distance from the base (left-hand end)
to the apex. If prices continue to move “sideways” in narrower and narrower
fluctuations from day to day after the three quarter mark is passed, they are
quite apt to keep right on to the apex and beyond in a dull drift or ripple
which leaves the chart analyst completely at sea. The best thing to do in such
cases is go away and look for something more promising elsewhere in your
chart book. And a third tricky point is that it becomes necessary sometimes to redraw
one or both boundaries of a Triangle before it is finally completed (i.e., before
prices break out and move away from it in a decisive fashion). This can
happen, for example, when, after the first two Rally Tops have established
a down-slanting upper boundary line, the third rally starting from the lower
boundary pushes up and through the original Top line by a moderate margin
and then, without developing a recognizable breakout volume on this move,
stops short of surpassing the highest level of the preceding (second) pattern
Top. When prices subsequently drop back again into pattern, it is necessary
to abandon the original upper boundary line and draw a new one across the
highs of the first and third rally tops.

Symmetrical Triangles

The most common form of a Triangle is composed of a series of price fluctuations,
each of which is smaller than its predecessor, each Minor Top failing
to attain the height of the preceding rally, and each Minor Recession stopping
above the level of the preceding Bottom. The result is a sort of contracting
“Dow Line” on the chart — a sideways price area or trading range whose
Top can be more or less accurately defined by a down-slanting boundary line
and whose Bottom can be similarly bounded by an up-slanting line. This type
of Triangle is called a Symmetrical Triangle. If we wanted to make a more
accurate application of the language of geometry, we might better call it an
Acute Triangle, since it is not at all necessary that its Top and Bottom boundaries
be of equal length or, in other words, make the same angle with the  horizontal axis. However, there is a very strong tendency in these formations
to approximate the symmetrical form; so, the established name will do well
enough. This pattern is also sometimes referred to as a “Coil.”
While the process of contraction or coiling, which makes up the price
action of the Symmetrical Triangle Pattern, is going on, trading activity exhibits
a diminishing trend, irregularly perhaps, but nevertheless quite noticeably
as time goes on. The converging upper and lower boundary lines of the price
formation come together somewhere out to the right (the future in the time
sense) of the chart, at the apex of our Triangle. As prices work their way along
in narrower and narrower fluctuations toward the apex, volume ebbs to an
abnormally low daily turnover. Then, if we are dealing with a typical example,
comes the action which first suggested the name “Coil.” For suddenly and
without warning, as though a coil spring had been wound tighter and tighter
and then snapped free, prices break out of their Triangle with a notable pickup
in volume, and leap away in a strong move which tends to approximate in
extent the up or down move that preceded its formation.
There is seldom any clue given on the one chart containing the Triangle
to tell in which direction prices are going to break out of the pattern until that action finally occurs. Sometimes you can get a pretty good idea of what
is likely to happen by observing what is going on at the same time in the
charts of other stocks (which is an important topic for later discussion), but
often, there is nothing to do but wait until the market makes up its mind
which way to go. And “making up its mind” is just what the market seems
to be doing when it builds a Triangle; everything about this pattern appears
to exemplify doubt, vacillation, and stalling until finally a decision is reached.

Price Action Following Confirmation: The Measuring Formula

The final step, the downside penetration of the neckline, may be attended
by some increase in activity, but usually isn’t at first. If volume remains small
for a few days as prices drift lower, a “Pullback” move frequently ensues
which brings quotations up again to the neckline level (rarely through it).
Normally, this is the “last gasp”; prices then turn down quickly, as a rule,
and break away on a sharply augmented turnover. Whether or not a Pullback Rally will occur after the initial penetration seems often to depend on the
condition of the market in general. If the whole market trend is turning down
at the same time as our individual issue, which has just completed its Headand-
Shoulders, there will probably be no Pullback; prices instead will tend
to accelerate their decline, with activity increasing as they leave the vicinity
of the Top. If, on the other hand, the general market is still firm, then an
attempt at a Pullback is likely. Also, the odds seem slightly to favor a Pullback
if the neckline has been broken before much of a right shoulder developed,
but certainly no very sure rules can be laid down. In any event, the Pullback
Rally is of practical interest chiefly to the trader who wants to sell the stock
short, or who has sold it short and has then to decide where he should place
a stop-loss order.
Now we come to one of the most interesting features of this basic Reversal
Formation — the indication which it gives as to the extent (in points) of the move which is likely to follow the completion of a Head-and-Shoulders.
Measure the number of points down vertically from the Top of the head to
the neckline as drawn on the chart. Then measure the same distance down
from the neckline at the point where prices finally penetrated it following
the completion of the right shoulder. The price level thus marked is the
minimum probable objective of the decline.

Let us hasten to state one important qualification to the Head-and-
Shoulders Measuring Formula. Refer back to our original set of specifications
for a Head-and-Shoulders. Under A, we required “strong rally climaxing a
more or less extensive advance.” If the up-move preceding the formation of
a Reversal Area has been small, the down-move following it may, in fact
probably will, be equally small. In brief, a Reversal Pattern has to have
something to reverse. So, we really have two minimums, one being the extent
of the advance preceding the formation of the Head-and-Shoulders and the
other that derived by our measuring formula; whichever is the smaller will
apply. The measuring rule is indicated on several of the examples that
illustrate this chapter. You can see now why a down-sloping neckline indicates
a “weaker” situation than an up-sloping, and just how much weaker,  as well as the fact that more than half of the minimum expected weakness
has already been expended in the decline from the Top of the head to the
penetration of the neckline.
The maximum indications are quite another matter, for which no simple
rules can be laid down. Factors that enter into this are the extent of the
previous rise, the size, volume, and duration of the Head-and-Shoulders
Formation, the general market Primary Trend (very important), and the
distance that prices can fall before they come to an established Support Zone.
Some of these are topics for later discussion.

Breaking the Neckline

Breaking the Neckline
The real tip-off appears when activity fails to pick up appreciably on the third
rally, the right shoulder. If the market remains dull as prices recover (at which
stage you can draw a tentative “neckline” on your chart) and if, as they
approach the approximate level of the left shoulder Top and begin to round
over, volume is still relatively small, your Head-and-Shoulders Top is at least
75% completed. Although the specific application of these pattern studies in
trading tactics is the province of the second part of this book, we may note
here that many stock traders sell or switch just as soon as they are sure a lowvolume
right shoulder has been completed, without waiting for the final
confirmation which we named under D as the breaking of the neckline.
Nevertheless, the Head-and-Shoulders is not complete, and an important
Reversal of Trend is not conclusively signaled until the neckline has
been penetrated downside by a decisive margin. Until the neckline is broken,
a certain percentage of Head-and-Shoulders developments, perhaps 20%,
are “saved”; i.e., prices go no lower, but simply flounder around listlessly
for a period of time in the general range of the right shoulder, eventually
firm up, and renew their advance.

Finally, it must be said that, in rare cases, a Head-and-Shoulders Top is
confirmed by a decisive neckline penetration and still prices do not go down
much farther. “False moves” such as this are the most difficult phenomena with
which the technical analyst has to cope. Fortunately, in the case of the Headand-
Shoulders, they are extremely rare. The odds are so overwhelmingly in
favor of the downtrend continuing once a Head-and-Shoulders has been confirmed
that it pays to believe the evidence of the chart no matter how much it
may appear to be out of accord with the prevailing news or market psychology.
There is one thing that can be said and is worth noting about Head-and-
Shoulders Formations that fail completion or produce false confirmations.

Head and Shoulder

The Head-and-Shoulders
If you followed closely and were able successfully to visualize how the foregoing
example of distribution would appear on a chart, you saw a Head-and-
Shoulders Top Formation. This is one of the more common and, by all odds,
the most reliable of the Major Reversal Patterns. Probably you have heard it
mentioned, for there are many traders who are familiar with its name, but
not so many who really know it and can distinguish it from somewhat similar
price developments which do not portend a real Reversal of Trend.
The typical or, if you will, the ideal Head-and-Shoulders Top is illustrated
in Diagram 2. You can easily see how it got its name. It consists of:
A. A strong rally, climaxing a more or less extensive advance, on which
trading volume becomes very heavy, followed by a Minor Recession
on which volume runs considerably less than it did during the days
of rise and at the Top. This is the “left shoulder.”
B. Another high-volume advance which reaches a higher level than the
top of the left shoulder, and then another reaction on less volume
which takes prices down to somewhere near the bottom level of the
preceding recession, somewhat lower perhaps or somewhat higher,
but, in any case, below the top of the left shoulder. This is the “Head.”
C. A third rally, but this time on decidedly less volume than accompanied
the formation of either the left shoulder or the head, which fails
to reach the height of the head before another decline sets in. This is
the “right shoulder.” D. Finally, decline of prices in this third recession down through a line
(the “neckline”) drawn across the Bottoms of the reactions between the
left shoulder and head, and the head and right shoulder, respectively,
and a close below that line by an amount approximately equivalent to
3% of the stock’s market price. This is the “confirmation” or “breakout.”
Note that each and every item cited in A, B, C, and D is essential to a
valid Head-and-Shoulders Top Formation. The lack of any one of them casts
in doubt the forecasting value of the pattern. In naming them, we have left
the way clear for the many variations that occur (for no two Head-and-
Shoulders are exactly alike) and have included only the features which must be present if we are to depend upon the pattern as signaling an important
Reversal of Trend.

Closing Prices

Only Closing Prices Used — Dow Theory pays no attention to any
extreme highs or lows which may be registered during a day and
before the market closes, but takes into account only the closing figures,
i.e., the average of the day’s final sale prices for the component
issues. We have discussed the psychological importance of the endof-
day prices under the subject of chart construction and need not
deal with it further here, except to say that this is another Dow rule
which has stood the test of time. It works thus: suppose an Intermediate
Advance in a Primary Uptrend reaches its peak on a certain day
at 11 a.m., at which hour the Industrial Average figures at, say, 152.45,
and then falls back to close at 150.70. All that the next advance will
have to do in order to indicate that the Primary Trend is still up is
register a daily close above 150.70. The previous intraday high of
152.45 does not count. Conversely, using the same figures for our first
advance, if the next upswing carries prices to an intraday high at, say,
152.60, but fails to register a closing price above 150.70, the continuation
of the Primary Bull Trend is still in doubt.
In recent years, differences of opinion have arisen among market
students as to the extent to which an Average should push beyond a
previous limit (Top or Bottom figure) in order to signal (or confirm or
reaffirm, as the case may be) a market trend. Dow and Hamilton evidently
regarded any penetration, even as little as 0.01, in closing price as a valid signal, but some modern commentators have required penetration
by a full point (1.00). We think that the original view has the
best of the argument, that the record shows little or nothing in practical
results to favor any of the proposed modifications. One incident in June
of 1946, to which we shall refer in the following chapter, shows a
decided advantage for the orthodox “any-penetration-whatever” rule.

Sideways Market Signals

“Lines” May Substitute for Secondaries — A Line in Dow Theory
parlance is a sideways movement (as it appears on the charts) in one
or both of the Averages, which lasts for 2 or 3 weeks or, sometimes,
for as many months, in the course of which prices fluctuate within a
range of approximately 5% or less (of their mean figure). The formation
of a Line signifies that pressure of buying and selling is more or
less in balance. Eventually, of course, either the offerings within that
price range are exhausted and those who want to buy stocks have to
raise their bids to induce owners to sell, or else those who are eager
to sell at the “Line” price range find that buyers have vanished and
that, in consequence, they must cut their prices in order to dispose of
their shares. Hence, an advance in prices through the upper limits of an established Line is a Bullish Signal and, conversely, a break down
through its lower limits is a Bearish Signal. Generally speaking, the
longer the Line (in duration) and the narrower or more compact its
price range, the greater the significance of its ultimate breakout.
Lines occur often enough to make their recognition essential to
followers of Dow’s principles. They may develop at important Tops
or Bottoms, signaling periods of distribution or of accumulation, respectively,
but they come more frequently as interludes of rest or
Consolidation in the progress of established Major Trends. Under
those circumstances, they take the place of normal Secondary Waves.
A Line may develop in one Average while the other is going through
a typical Secondary Reaction. It is worth noting that a price movement
out of a Line, either up or down, is usually followed by a more
extensive additional move in the same direction than can be counted
on to follow the “signal” produced when a new wave pushes beyond
the limits set by a preceding Primary Wave. The direction in which
prices will break out of a Line cannot be determined in advance of
the actual movement. The 5% limit ordinarily assigned to a Line is
arbitrarily based on experience; there have been a few slightly wider
sideways movements which, by virtue of their compactness and welldefined
boundaries, could be construed as true Lines. (Further on in
this book, we shall see that the Dow Line is, in many respects, similar
to the more strictly defined patterns known as Rectangles which appear
on the charts of individual stocks.)

The Bear Market

The Bear Market — Primary Downtrends are also usually (but again,
not invariably) characterized by three phases. The first is the distribution
period (which really starts in the later stages of the preceding Bull
Market). During this phase, farsighted investors sense the fact that
business earnings have reached an abnormal height and unload their
holdings at an increasing pace. Trading volume is still high, though
tending to diminish on rallies, and the “public” is still active but
beginning to show signs of frustration as hoped-for profits fade away.
The second phase is the Panic Phase. Buyers begin to thin out and
sellers become more urgent; the downward trend of prices suddenly
accelerates into an almost vertical drop, while volume mounts to
climactic proportions. After the Panic Phase (which usually runs too
far relative to then-existing business conditions), there may be a fairly
long Secondary Recovery or a sideways movement, and then the third
phase begins.


This is characterized by discouraged selling on the part of those
investors who held on through the Panic or, perhaps, bought during it
because stocks looked cheap in comparison with prices which had ruled
a few months earlier. The business news now begins to deteriorate. As
the third phase proceeds, the downward movement is less rapid, but
is maintained by more and more distress selling from those who have
to raise cash for other needs. The “cats and dogs” may lose practically
all their previous Bull Advance in the first two phases. Better-grade
stocks decline more gradually, because their owners cling to them to
the last. And, the final stage of a Bear Market, in consequence, is frequently
concentrated in such issues. The Bear Market ends when everything
in the way of possible bad news, the worst to be expected, has
been discounted, and it is usually over before all the bad news is “out.”


The three Bear Market phases described in the preceding paragraph
are not the same as those named by others who have discussed this
subject, but the writers of this study feel that they represent a more
accurate and realistic division of the Primary down moves of the past
30 years. The reader should be warned, however, that no two Bear
Markets are exactly alike, and neither are any two Bull Markets. Some
may lack one or another of the three typical phases. A few Major
Advances have passed from the first to the third stage with only a
very brief and rapid intervening markup. A few short Bear Markets
have developed no marked Panic Phase and others have ended with
it, as in April 1939. No time limits can be set for any phase; the third
stage of a Bull Market, for example, the phase of excited speculation
and great public activity, may last for more than a year or run out in
a month or two. The Panic Phase of a Bear Market is usually exhausted
in a very few weeks if not in days, but the 1929 through 1932 decline
was interspersed with at least five Panic Waves of major proportions.
Nevertheless, the typical characteristics of Primary Trends are well
worth keeping in mind. If you know the symptoms which normally
accompany the last stage of a Bull Market, for example, you are less
likely to be deluded by its exciting atmosphere.

Bull Market

The Bull Market — Primary Uptrends are usually (but not invariably)
divisible into three phases. The first is the phase of accumulation during
which farsighted investors, sensing that business, although now
depressed, is due to turn up, are willing to pick up all the shares
offered by discouraged and distressed sellers, and to raise their bids
gradually as such selling diminishes in volume. Financial reports are
still bad — in fact, often at their worst — during this phase. The
“public” is completely disgusted with the stock market — out of it
entirely. Activity is only moderate but beginning to increase on the
rallies (Minor Advances).
The second phase is one of fairly steady advance and increasing
activity as the improved tone of business and a rising trend in corporate
earnings begin to attract attention. It is during this phase that the
“technical” trader normally is able to reap his best harvest of profits.

Finally, comes the third phase when the market boils with activity
as the “public” flocks to the boardrooms. All the financial news is
good, price advances are spectacular and frequently “make the front
page” of the daily papers, and new issues are brought out in increasing
numbers. It is during this phase that one of your friends will call
up and blithely remark, “Say, I see the market is going up. What’s a
good buy?” — all oblivious to the fact that it has been going up for
perhaps two years, has already gone up a long ways, and is now
reaching the stage where it might be more appropriate to ask, “What’s
a good thing to sell?” In the last stage of this phase, with speculation
rampant, volume continues to rise, but “air pockets” appear with
increasing frequency; the “cats and dogs” (low-priced stocks of no
investment value) are whirled up, but more and more of the top-grade
issues refuse to follow

Dow Theory

Dow Theory

The Major (Primary) Trends in stock prices are like
the tides. We can compare a Bull Market to an incoming or flood tide which
carries the water farther and farther up the beach until finally it reaches highwater
mark and begins to turn. Then follows the receding or ebb tide,
comparable to a Bear Market. But all the time, during both ebb and flow of
the tide, the waves are rolling in, breaking on the beach, and then receding.
While the tide is rising, each succeeding wave pushes a little farther up onto
the shore and, as it recedes, does not carry the water quite so far back as did
its predecessor. During the tidal ebb, each advancing wave falls a little short
of the mark set by the one before it, and each receding wave uncovers a little
more of the beach. These waves are the Intermediate Trends, Primary or
Secondary, depending on whether their movement is with or against the
direction of the tide. Meanwhile, the surface of the water is constantly agitated
by wavelets, ripples, and “cat’s-paws” moving with or against or across
the trend of the waves — these are analogous to the market’s Minor Trends,
its unimportant day-to-day fluctuations. The tide, the wave, and the ripple
represent, respectively, the Primary or Major, the Secondary or Intermediate,
and the Minor Trends of the market.
Tide, Wave,


A shore dweller who had no tide table might set about determining the
direction of the tide by driving a stake in the beach at the highest point
reached by an incoming wave. Then if the next wave pushed the water up
beyond his stake he would know the tide was rising. If he shifted his stake
with the peak mark of each wave, a time would come when one wave would
stop and start to recede short of his previous mark; then he would know
that the tide had turned, had started to ebb. That, in effect (and much
simplified), is what the Dow theorist does in defining the trend of the stock
market.
The comparison with tide, wave, and ripple has been used since the
earliest days of the Dow Theory. It is even possible that the movements of
the sea may have suggested the elements of the theory to Dow. But the
analogy cannot be pushed too far. The tides and waves of the stock market
are nothing like as regular as those of the ocean. Tables can be prepared
years in advance to predict accurately the time of every ebb and flow of the
waters, but no timetables are provided by the Dow Theory for the stock
market.