The Dow Theory may not always be accurate, but it has been part of the foundation of modern market analysis.
The Dow Theory was formulated by the famous economist Charles Dow. What is important is that the Dow Theory concerns itself with the movements of very broad markets, rather than individual stocks.
In particular, the Dow Theory, which was named post-mortem and summarized the editorials Dow wrote during his life, focuses on the movement of the Industrials (DJIA) relative to the Transportation index (DJTA) and theorizes that if one moves the other should follow, and if there is discord a reversal is probably coming.
It supports the idea that the market goes through natural cycles from peak to trough, and back. The Dow Theory reflects a general wisdom of the markets, but its predictive power is very limited.
What is Dow Theory?
What is the Dow Jones Industrial Average?
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