Stock Trading.

The DOW Theory of Technical Analysis focused on using general stock market trends as a barometer for general business conditions. It was not originally intended to forecast stock prices. However, subsequent work has focused almost exclusively on this use of the Theory. Dow’s theory is a core aspect of technical analysis and market timing.

Dow understood among the firsts the importance of market timing and reactivity

Rolling out the Random Walk theory long before it was so named, Mr. Dow believed that everything known about the future business of a company was already priced into its stock. Therefore, he felt this tool was the best predictor there could be of future economic activity. And, by choosing the most important stocks in the United States to compose his index, he could determine where the economy of the country was headed. A nice tool for a newspaper focused on such an endeavor. Mr. Dow's work led to what is commonly referred to as the Dow Theory. This Dow Theory, which started to include investigations into the trends and cycles of the stock market, created the foundation for what are now the thousands of types of technical analysis approaches practiced in the market today.

Some concepts of the theory of Technical Analysis:

• The Averages Discount Everything.
• The Market Is Comprised of Three Trends.
• Primary Trends Have Three Phases.
• The Averages Must Confirm Each Other.
• The Volume Confirms the Trend.

In general, the Theory adherents will buy when the market moves higher than a previous peak, and sell when it goes below the preceding valley.

The Theory is predicated on the idea that a market has discernible cycles. The cycles average four years, but may vary in length (2-10yrs). Each cycle is divided into primary, secondary and minor trends.

Dow specifies that closing prices should only be used. This is because closing prices reflect the price level at which informed investors are willing to carry positions overnight.

Dow theory technical analysis for QQQQ timing (AMEX: QQQQ), S&P 500 timing (AMEX: SPY), Dow Jones timing (AMEX: DIA) based on the volume of all index constituents works very well for index shifts timing.

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