by Rasool Cunningham
Philadelphia, PA (DYDD)
Charles Dow is the father of technical analysis. Understanding the basic tenants of his theory is to understand the basic tenants of all technical analysis. At first glance the basics of Dow Theory seem like things us traders should know by now. Yet, we still see traders violating some of these tenants (I am not without guilt.) So a reminder should always be welcomed.
I love that quote.
I think it encompasses the whole of technical analysis. Dow went on to say the most import movement is the “main movement,” and the most important thing to understand in order to be successful in trading stocks or any market is: determining the directional trend of this main movement. Higher swing highs and higher swing lows, and vise-versa. That sounds super simple, but how many times have you seen people become really bearish before seeing major swings make lower lows AND lower highs? I’ve done it.
If you’ve read the book on Jessie Livermoore called Reminiscences of a Stock Operator, (get the audio book!) then you may remember the part about the old guy that always said “it’s a bull market, ya know!” and how at first he thought the guy was crazy. Jessie thought it was worthless for him to keep saying this. He later learned how important it was to keep in mind what direction the main movement was in. Read (or listen to!) that book if you haven’t yet; re-read it if haven’t read it in a while.
But Dow’s trend theory is just as important as his index theory. But we hear most about the index theory. His index theory is brilliant. The basics of it is the biggest companies on the biggest markets will tell us something about the wider market. Knowing of business inner workings he knew that prices of the biggest companies who transported goods would lead the prices of the biggest companies responsible for payment for these goods. A pick up in transportation profits would lead to a pick up in goods makers and sellers; industrial’s profits, and stock prices, and vise-versa.
While starting what would become the Wall Street Journal, he made an index of each. He was old school, he made his charts by hand with big ass pieces of paper and pencil or pen. He never put it all into a theory. Men after him would do that. There are people who are a lot more qualified than I to even go over the basics of what is now called Dow Theory, but I know who can. But I trade Forex with an index mind frame. Like, how US Dollar pairs trade relevant to each other. He used the price of one instrument to trade another. that was genius. He was the first guy to mention point & figure charting. Dow was just a beast, and should be honored.
If we peal back the layers to his theory we find the foundation of all modern Technical Analysis (TA.)
You wanna know it all? Start pealing that onion! Ha!
I found a cool looking book while doing research for this post, looks like a good one:
His wikipedia page looks pretty accurate also. A look back at where all this TA stuff comes from gives us some confidence that we’re not crazy. Smarter people than us made some very lasting impacts on the world markets using this stuff. This dude died in 1902 and you still hear his name every single day: The Dow.
It was his theory that predicted this most recent crash by months! I sometimes write posts about what I’m observing through a Charles Dow lens. Or some other great market observer from the past because I think it’s important to stay in tune with what has lasted/ worked for so long. In a way I say all this to say: The Dow trend has changed folks. We have lower lows and lower high’s, and the lows were made on big volume. The type of volume that doesn’t just turn around and buy what they just sold. Not with the global backdrop looking the way it is.
The old guy from Jessie Livermore’s day would now say: it’s a Bear market, ya know! Every day, until the trend changes. Outside of all the news stories and pundit harangues there is price. It can’t be manipulated for long. It’s the only thing about the markets that can’t keep going without telling the truth along the way. I place so much emphasis on it for this reason. I think all TA’s do.
Anyway, thanks for reading! Good luck and may the force be with you in these markets traders. I hope this helps you along the way!