Dow’s Theory and the Averages
Charles H. Dow will always hold a unique position in the history of the financial markets. He was one of the preeminent journalists of his day, as co-founder of Dow Jones & Company, and the first editor of The Wall Street Journal and later Barron’s. He also devised the first index to measure the trend of the market and penned some basic principles of stock market behavior—known as the Dow Theory—that laid the foundation on which much of technical analysis is based today.
Yet the Dow Jones averages as they stand today, and the Dow Theory regarding the recurring characteristics of stock prices have been just about totally discounted by academicians, are considered irrelevant by an ever larger number of modern-day financial analysts, and even renounced by many technicians. For a variety of reasons, ranging from inherent drawbacks in the averages to distrust of the Dow Theory due to misinterpretation by some of its proponents, it is fair to say that Charles Dow’s pioneering work is increasingly being considered obsolete, relegated to the status of historical curiosity.
However, by taking some time to reflect on the Dow Theory, what the averages represent and how they should be used, investors may well find his theory of gauging the market trends still a very remarkable tool.
In a nutshell, the Dow Theory states that there is a general trend of the market. Instead of the stock market being made up of unrelated fluctuations of individual stocks, Charles Dow thought there was an underlying market trend. The averages grew from Mr. Dow’s efforts to express the general trend of the market.
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