The Dow Theory is still the foundation of chart interpretation and applies equally to stocks, financial markets, commodities, and the wide variety of investment vehicles used to trade them. It is part investor psychology supported by chart analysis. It is impressive that it has withstood the tests of more than 100 years. Charles Dow was the first to create an index of similar stocks-the Industrials and the Railroads (Transportation), although today’s components are very different from those in 1897. The purpose of the index was to smooth out erratic price movement and find consistency by combining less active stocks. Thin trading causes unreliable price patterns.

Dow’s work can be viewed in two parts: his theory of price movement, and his method of implementation. Both are inseparable to its success. Dow determined that the stock market moved as the ocean, in three waves, called primary, secondary, and daily fluctuations. The major advances and declines, ...

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