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The Dow Theory
By: iStockAnalyst   Sunday, July 15, 2007 10:56 PM
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.

Hamilton passed away six weeks after he wrote the above editorial. It is a tragedy that probably not a great number of people at the Wall Street Journal or Barron's today have even heard of the Dow Theory, let alone have a complete understanding of it.


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