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Dow theory |
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Dow TheoryUsed in the context of general equities. Technical theory that a major trend in the stock market must be confirmed by simultaneous movement of the Dow Jones Industrial Average and the Dow Jones Transportation Average to new highs or lows.Dow theoryIn 1887 Charles Dow (as in 'The Dow Jones') developed two stock market 'averages':The Industrial Average, made up of 12 blue chip stocksThe Rail Average, made up of 20 railroad companiesIn 1900 he wrote a series of articles noting that the direction of prices in each average appeared to be based on a set of rules. Collectively, these became known as The Dow Theory and the key precepts are summarised below.Dow TheoryA share price reflects everything that is known about a stockThis means that all the positives and all the negatives about a company are assumed to be known by the market and built into the share price. Implicitly, no stocks are undervalued, because the market has 'perfect' knowledge.At any given time, there are 3 trends unfolding in the stock market:The primary trend lasting for more than one yearThe secondary trend which is a corrective reaction to the primary trend and usually lasts form one to three monthsThe tertiary or minor trend which is a short term movement lasting from one day to three weeks.Primary trends have three phasesAggressive buying by well informed investors ahead of economic recovery while most investors are still bearish about the marketGeneral buying by the majority of investors as company earnings pick up and economic conditions improveHeadlong rush into stocks by everybody, as companies report record earnings. Meanwhile, the well informed investors are starting to sell even though prices may be rising.Volume Confirms the TrendRallies in the market are accompanied by increasing volume, and falls with decreasing volume.A Trend Continues Until a Reversal SignalIf a primary trend is confirmed by the movement of both averages it will continue until there is a definite reversal signal. So once a primary trend has started the chances are it will continue, but once it has been around for a while the chances of continuation are less.Similar MatchesGame theoryGame theoryThe modeling of strategic interactions among agents, used in economic models where the numbers of interacting agents (firms, governments, etc.) is small enough that each has a perceptible influence on the others. Theory of second bestTheory of second bestSee second best. Portfolio theoryPortfolio theorySee: Modern portfolio theory. Labor theory of valueLabor theory of valueThe theory that the value of any produced good or service is equal to the amount of labor used, directly and indirectly, to produce it. Sometimes said to underlie the Ricardian Model of international trade. Local expectations theoryLocal expectations theoryA form of the pure expectations theory that suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon. Further Suggestionsefficient market theoryShort interest theory Modern portfolio theory Product cycle theory Elliott Wave Theory Bubble theory Expectations theory of forward exchange rates Presidential election cycle theory capital market theory Complexity Theory Agency theory New Trade Theory Dow dividend theory Greater fool theory Efficient markets theory(EMT) Trade theory Preferred habitat theory Conduit theory Odd lot theory Game Theory Normal backwardation theory Cushion theory Purchasing power parity theory Bicycle Theory Dependency Theory |
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