THE MARKET REVIEWS ALL INFORMATION AVAILABLE. Everything you need to know is reflected in the market through price. The price is the sum of the hopes, fears, and expectations of all participants. Interest rate fluctuations, earnings expectations, revenue forecasts, presidential elections, new product innovations, ..., everything is priced in the market. Unexpected things can happen, but usually, only affect the short-term trend. the main trend will not be affected.

The chart below of Coca-Cola's stock (ticker KO) is a relative example of a trend. Coca-Cola's downtrend begins with a sharp drop from above $ 90 and bottoms out at $ 52. Stocks rose again in October and November 1998, but by December prices began to fall again. According to Dow Theory, the rally in October and November is seen as a secondary move (against the main trend). Stock prices caught up with the general market's rally at that time. However, when the overall market peaked, Coca-Cola started falling again and resumed its main trend.

Sometimes markets react negatively to good news, Hamilton noted. The reason is simple: The market is always looking ahead. At a time when news appeared on the sidewalk iced tea shops, that was when the prices had soared. This explains a famous Wall Street axiom: "Buy the rumor, sell the news". When rumors began to appear, buyers stepped in and paid higher prices. By the time the news was officially released, the price had risen high enough and fully reflected the news, when profit taking actions were usually taken place (as investors were already "out of excitement") ). Take, for example, the stock Yahoo! (YHOO) in early 1999 has increased until the date the earnings report is published. Although earnings exceeded expectations, the stock still fell about 20% during this time.


The third hypothesis is: THE DOW THEORY IS NOT TO MAKE THE MARKET. Hamilton and Dow concede that the Dow Theory is not a surefire vehicle to beat the market. Rather it should be seen as a set of guidelines and principles to assist investors and traders in researching the market in their own way. The Dow Theory provides a number of mechanisms for investors to use, helping to eliminate some of the negative emotions. Hamilton warns that investors should not be swayed by their own desires. When analyzing the market, make sure you are analyzing objectively and seeing what's going on, not what you want to see. Usually, if traders are buying, they just want to watch the bullish signals and ignore the bearish signals. Conversely, investors who do not enter the market or go short, tend to focus on the negative aspects of the price action and ignore any bullish movements. The Dow Theory provides a mechanism to help us make our decisions less vaguely.

Although this theory is not intended for short-term traders, it can still add value to short-term traders. Regardless of the timeframe you use, it's always helpful to identify key trends. According to Hamilton, those who successfully apply Dow Theory rarely trade more than 4 or 5 times a year. Remember that intraday movements, daily movements, or secondary movements (as opposed to major trends) can be easily manipulated, but the main trend is not. They don't worry about a few minor reversals or secondary highs/bottoms; Their main concern is capturing big moves. Both Hamilton and Dow recommend careful daily market research, but they also advise investors to minimize the effect of random movements on buying/selling decisions and focus on the main trend. It's easy to get caught up in the momentary frenzy and forget about the main trend. In the example above, the main trend for Coca-Cola is still down, despite some strong rallies, the stock has never made a higher high.