Dow Theory Update

When it comes to Dow Theory, there seems to be no shortage of opinion, but most often, that opinion is wrong. This is largely because of the fact that very few people have actually read and studied the original material by Charles H. Dow, William Peter Hamilton and Robert Rhea. Without that background, one cannot truly understand Dow Theory.

Of late I have been asked whether or not the bettering of the April highs triggered a so-called “Dow Theory buy signal.” Before I answer this question, it deserves a full explanation.

First let me say that in accordance with orthodox Dow Theory, there is no “buy” or “sell” signal. That’s right. Contrary to popular belief, there is no such thing. The Dow Theory founding fathers would anticipate trend changes just like we do. They would use minor negative non-confirmations and negative structural developments that hinted of a trend change as “Sell Spots.” At bottoms they would do the exact opposite using minor positive non-confirmations and positive structural developments that hinted of an upward trend reversal as “Buy Spots.”

They then looked for the Industrials and what was then the Rails, to close above their previous “Secondary High Point” in the case of a bottom, or the previous “Secondary Low Point” in the case of a top, in order to confirm that a “Primary Trend Change” had occurred. It is clear from reading the original writings that they did not wait for these Primary Trend Changes to occur before establishing positions. The problem with the interpretation today is that people do not understand what constitutes a secondary high or low point and they erroneously interpret moves above and below what is perceived as a secondary high or low point to be a “Dow Theory Buy or Sell signal.” Fact is, there is no such thing as a “Dow Theory Buy or Sell signal.” According to the original writings, there were Buy and Sell Spots, which were based on minor structural developments, in anticipation of turns and there are Primary Trend changes. (more)