Dow Theory Vocabulary Flashcards

Vocabulary flashcards covering core definitions, tenets, trends, phases, and reversal patterns of Dow Theory from Chapter 2.

Dow Theory

The body of basic premises credited to Charles H. Dow and codified by later writers, which lays the basic foundation for modern day technical analysis.

Charles H. Dow

The Wall Street Journal editor who published early stock market averages and editorials that served as the original foundation for Dow Theory.

William P. Hamilton

Successor to Charles H. Dow and author of The Stock Market Barometer, who carried on developing and organizing Dow's original writings.

S. A. Nelson

Author of The ABC of Stock Speculation and acquaintance of Charles H. Dow, who was the first person to use the term 'Dow Theory'.

Robert Rhea

Student of William P. Hamilton and author of The Dow Theory, who formally codified, categorized, and refined the theory under three key assumptions.

W. D. Gann

A prominent technical analyst who shared Dow Theory's emphasis on the psychological significance of the $50\%$ retracement level.

Stock Market Average

An index of stocks created to better reflect the general action of the markets, instead of gauging market behavior through individual stock action.

The Averages Discount Everything

The first tenet of Dow Theory, stating that the market is the end result of all participatory action, representing all information that may be known to the markets.

Acts of God

Unexpected events or unknown information that the market cannot discount prior to occurrence, though it can absorb, react, and adjust to such shocks fairly rapidly.

Only Closing Prices Are Recognized

The rule in Dow Theory stating that regardless of how large the high and low price excursions may be on any one day, only the final closing price is used.

Primary Trend

The largest trend in Dow Theory, normally expected to last from months to years, which Robert Rhea held to be a more reliable barometer for investment decisions.

Uptrend

A market trend defined in Dow Theory primarily as a sequence of successively higher peaks and troughs.

Downtrend

A market trend defined in Dow Theory primarily as a sequence of successively lower peaks and troughs.

Penetration

The price action of moving through a previous peak or trough, which signals a trend continuation or reversal in Dow Theory.

Arithmetic Scaling

A chart scaling method that plots price in equal price increments, which tends to give slower trend change signals as uptrend lines are violated later.

Logarithmic Scaling

A chart scaling method that plots price in equal proportional (percentage) increments, which tends to give earlier trend change signals as uptrend lines are violated sooner.

Secondary Reaction

An intermediate trend moving in the opposite direction of the existing primary trend, usually lasting from weeks to approximately three months, and frequently slightly longer.

Minor Trend

Short-term market fluctuations usually lasting from days to weeks that represent market noise, upon which no investment decision should be based except when forming lines.

Line

A narrow horizontal ranging formation on the daily chart formed in anticipation of significant news or economic announcements, usually resulting in strong breakouts.

Accumulation Phase

The first phase of a primary trend occurring after a deep and rapid price decline, where uninformed participants sell at any price while better-informed participants accumulate shares at cheap prices.

Trending Phase

The middle phase of a primary trend consisting of uptrend and downtrend phases, driven by participants expecting higher or lower prices as trend momentum builds.

Distribution Phase

The final phase of a primary trend occurring after a prolonged rise, characterized by irrational exuberance from uninformed buyers while smart investors liquidate gradually.

Trend Persistence

The fourth tenet of Dow Theory, stating that a trend is assumed to persist until there is evidence to the contrary, identified by a penetration of a previous significant peak or trough.

Failure Swing

A top reversal variation in which the second peak fails to penetrate the previous peak, where a subsequent breach of prior support signals a potential trend direction change.

Non-Failure Swing

A top reversal variation in which the second peak succeeds in penetrating the previous peak, requiring a breach of the second, lower support level for a conclusive sell signal.

Double Top

A top reversal variation in which the second peak matches the level of the previous peak almost exactly.

Double Bottom

A bottom reversal variation in which the second trough matches the level of the previous trough almost exactly.

Confirmation of the Averages

The fifth tenet of Dow Theory, stating that both the Industrial Average and the Transportation (Railroad) Average must extend beyond their secondary peaks in order for a trend to be established.

Non-Confirmation

A situation where a signal in one average is not confirmed by the other average, causing an unconfirmed bearish signal to be regarded as a bullish indication.

Volume Confirmation

The sixth tenet of Dow Theory, stating that volume must expand or increase in the direction of the existing trend; failure to expand indicates potential trend weakness.