Dow Theory

Charles Dow:

• Father of Technical Analysis

• In 1890 Dow realize that prices move in a TREND
• Formation Dow Jones Index
• Developed Transportation Average (20 Transportation stocks)
• Developed Industrial Average (30 Utility stocks)
Principles of Dow Theory:

• Indices discount everything

• Base on closing prices
• 3 broad market trends
• Indices must confirm each other
• Volume must confirm
• Market may remain sideways
Type of Trends:

1. Primary Trend : Long Term, Multi year, up or down

2. Secondary reaction : Corrective, part of Long term trend
3. Daily fluctuation : Minor Trend, Noise
CNX Nifty and CNX Mid Cap Divergence
Nifty Monthly Primary Trend (Oct - 08 to Aug - 19)
Nifty Secondary Trend (Weekly corrections)
Confirmation:

• Both Industrial and Transportation Averages must

confirm each other for valid trend
• In India CNX Nifty and CNX Midcap must confirm each
other
• Keep an eye on divergences as early signal of Trend
Change
Volume Confirmation:

• Volume must support price

• Uptrend : Volume rises with price rise and falls with price fall
• Downtrend : Volume rises with price fall and falls with price rise
Tata Motors Volume price relationship
Sideways Market (RIL 2009 to 2017)
Identify Trend :
• Uptrend : Every subsequent high is higher than previous high
and subsequent low is higher than previous low
• Downtrend : Every subsequent low is lower than previous
low and subsequent high is lower than previous high
Dow Theory – Infosys Trend Study:
Stop Loss :
• In rising trend Stop loss is below the prior low
• In falling trend stop loss is above prior high