One of the few speculators who discovered this relatively
new concept of making money on Wall Street at the time was
Jesse Livermore. He was able to accomplish this only through trial and error and the making and losing of several fortunes.
William P. Hamilton, Dow's understudy and the fourth editor of the
Wall Street Journal, continued Dow's legacy after his death in 1903.
The Dow Theory as interpreted by Hamilton forms the basis of all modern
technical analysis today. He wrote about the Dow Theory for the Wall
Street Journal for more than 20 years. His additions to the Theory
included:
- The Averages discount everything
- The primary trend cannot be manipulated
- Both the Industrials and Rails (the modern day Transports) must confirm each other in order for the signal to have authority
- The Theory is not infallible. If someone did find such a
system, then he or she will own the world in relatively short order and
speculation as we know it will not exist.
- Determining the trend by spotting "higher highs" or "lower lows"
Hamilton's predictions of the trends were uncannily accurate, even
as he developed a wide following from his editorials. A major reason
why he was accurate almost all the time was his lack of a writing
schedule - choosing only to write when he had something to say about
the market, sometimes going for weeks without writing a single word.
The one significant time when he erred was in late 1925 and early
1926 when he erroneously labeled a serious secondary reaction in a
primary bull market as a bear market. Followers of Hamilton lost
heavily during that period, as the market bottomed out in March 1926
(Industrials 135.20 and Rails 102.41) and was getting ready to resume
its long advance that would not end (tragically) until September 1929.
Even so, Hamilton would always be remembered for penning the
following editorial on October 25, 1929, just days before the crash.
His words proved prophetic - calling for the beginning of a new primary
bear market. Part of his now-famous editorial is reproduced below:
A Turn in the Tide - October 25, 1929
On the late Charles H. Dow's well known method of reading the
stock market movement from the Dow-Jones averages, the twenty railroad
stocks on Wednesday, October 23 confirmed a bearish indication given by
the industrials two days before. Together the averages gave the signal
for a bear market in stocks after a major bull market with the
unprecedented duration of almost six years. It is noteworthy that
Barron's and the Dow-Jones NEWS service on October 21 pointed out the
significance of the industrial signal, given subsequent confirmation by
the railroad average.
