Gino's Blog : Did you know Dow was a technician?

I finished reading Jesse Livermore - Reminiscences Of A Stock Operator, basically another book about a guy that made his fortunes then lost it and came back and so on. My eyes kept glazing over and my mind wandered around while reading it, kind of like when I walk into a truckstop lounge and there's a bunch of burly, scruffy truck drivers sitting there watching The Days of Our Lives or some other soap opera.

I've moved on to a book by John J. Murphy called Technical Analysis Of The Financial Markets. Now this seams more like my kind of book, like an instruction manual, I need to learn something when I read.

Murphy starts the book off with a little history I found interesting. Did you know Dow was a technician? Charles Dow and Edward Jones founded Dow Jones & Co. in 1882. Dow never wrote a book but published a bunch of his ideas in The Wall Street Journal. The first average Dow came up with was in 1884 and consisted of 9 railroads and 2 manufacturing firms. In 1897 Dow thought 2 averages would better represent the economy and created a 12 stock industrial and a 20 stock railroad index, by 1928 the industrial index grew to 30 stocks were it still stands today. A year after Dow died S.A. Nelson compiled Dow's Wall Street Jounal editorials and wrote a book were he coined the phrase The Dow Theory. What is the Dow Theory? I'm glad you asked, I took notes, lol.

THE DOW THEORY
1.THE AVERAGES DISCOUNT EVERYTHING. All of Wall street's knowledge is built into the averages, be it the industrials, transports, financials, etc... All investors/traders knowledge past, present and future thinking, technical, fundamental, speculative, whether they just sold it, bought it or been holding it, is in the price. So in my own words -> the price is what it is because it is.
2. THE MARKET HAS THREE TRENDS. Minor = 3 weeks or less, Secondary = 3 weeks to 3 months and Primary = over 1 year. Dow compaired this to watching the ocean from a beach and seeing the little ripples, the waves and tides coming onto the beach.
3.MAJOR TRENDS HAVE THREE PHASES. Accumulation, Public Participation and Distribution.
4.THE AVERAGES MUST CONFIRM EACH OTHER. Dow meant no bull or bear market signal is true, unless both averages (at that time there was only 2) gave the same signal.
5.VOLUME MUST CONFIRM THE TREND. Volume should increase in the direction of the trend.
6.A TREND IS ASSUMED TO BE IN EFFECT UNTIL IT GIVES A DEFINATE SIGNAL THAT IT HAS REVERSED. Based on the physical law an object in motion tends to continue in motion until some external force causes it to change direction.

So far I'm up to about page 120 and Murphy has explained alot of the basics about chart reading, tops and bottoms, trend lines and triangles. He also has references about Gann, the Elliot Wave, Fibonacci and P&F charts and says the book will go more in depth about them in later chapters.


HEY!! I just realized my P&P score just broke 99.