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.