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TRADE AND FINANCE.
THE DOW THEORY.
"Forecasting Market Trends.
.bor forty years the application of the
Iow theory to Stock Exchange price
movements has been used successfully in
America as a means of forecasting the
ctming trend of business and security
prices.
- Charles Dow, who originated the
theary, stated it was applicable to any
world stock exchange for which the
necessary daily exchanges in the indus
trial prices,'as well as the daily volume
of trading, were available. It is now
beng applied to the London Stock Ex
change as well as to Wall-street.
'The closing prices of selected groups
of leading industrial stocks are reduced
daml to index figures known as "the aver
ages." It is claimed, quite logically, that
the' fluctuations of these averages are a
true reflection of all that is known, or
anticipated, concerning the factors in
flitepcing the prices of stocks and chares.
- These "averages," when plotted on
graph paper, give a pictorial representa
tion of the movement of share prices.
Daily Movements Shown.
Investors who follow the Dow Theory
find it best to keep graphs or charts
showing the daily movements of the
averages plus the volume of daily share
tiansactions.
* William Hamilton, late editor of the
"Wall-street Journal," who wrote many
leading articles on the theory first in
vented by Charles H. Dow, likened the
movement of the averages to that of the
sea; the tide, gradually coming in or
going out, he compared with the prim
ary or year-to-year market trend; the
waves he represented as being the inter
moittent changes. In these broad move
ments which he called the secondary, or
mfoith-to-month trends; and be looked
upon the ripples as being the day-to-day
chuages which are only important be
chii$e they eventually' form the second
ary trend.
Indications of Higher Levelse
. Successive rallies, taking both the In
dustrial and Rail averages to new high
I~vels with subsequent declines termin
ating above preceding lows indicates
higher prices and vice versa. Such move
ments, when graphed, form an upward
or downward sig-zag pattern.
"New highs or lows' need to be regis
tered by both averages in order to be
accepted as valid indications, but these
leed not occur at the same time, athough
such action carries more weight if
athrieved simultaneously.
'?S long as both averages move in har
mony, the trend in being may be con
sidesed as likely to continue, but when
one average fails to confirm the action
'f the other a period of uncertainty is
indicated which often ends in a reversal
of trend. Such changes of trend occur
in a bull market when one or both the
averages fail to register new highs and
subsequently fall to new minor lows. This
s. usually accompanied by increasing.
volume on the down side and dullness
an rallies, showing a greater .desire to
sel than to buy shares.
The opposite is the case in a bear
market.
an Corrected Eventually.
"?All rallies or declines are corrected
eventually by a loss or gain of from one
to -two-thirds of the extent of the pre
vious movement. A rally or decline is
aiotconsidered as of importance unless it
exceeds 3 per cent in either one of the
averages.
The minor trend changes frequently
in this way, but sooner or later the
lbondary trend is similarly corrected.
So also with the major trend, which
cdanges seldom (such as in 1929 and
Sometimes both the averages move
adeIways for a period of weeks, with only
emall fluctuations. This is called a "line"
and often indicates a sharp move in the
direction in which an emergence from
that "line" is effected.
Successful use of the Dow Theory re
quires serious study and an impartial
summing up of the evidence. The wish
mist never be allowed to be father to
the thought .
": a doctor uses temperature, pulse and
respiration charts for his diagnoses, so
IDow Theorists use their industrial, rail
and volume charts. Bad action by any
of these may mean a change in the con
dition of the patient, or of the Stock
Exchange.
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