It is believed by many that the one of the founding fathers of Technical Analysis was Charles Dow with his Dow Theory. Charles Dow never wrote a book on his theory, but Robert Rhea did in 1932 which he respectfully named “The Dow Theory”. In Robert Rheas book he basically quotes much of William Hamilton’s writing from in the Wall Street Journal. William Hamilton wrote for the Wall Street Journal for nearly three decades before his sudden death in 1929. He wrote a column giving his insight to the future of the markets using Charles Dow’s theory (which he learned directly from him) which proved rather accurate. William Hamilton wrote a book on the topic in 1922 titled “The Stock Market Barometer”.
It is Funny how interpretation can differ from one person to the next. If you read this book with the notion you will learn a system of predicting the US markets, then you will probably come away with that (not necessarily accurately). The Dow Theory does include a method, but it also includes a reason for the method. Charles Dow did not use his theory to predict the market, more to determine where we were in a specific cycle. He used charts to confirm where we were on the economic map. It is widely accepted that we follow a relatively predictable economic path since we maintain a monetary policy (i.e. if A happens then B is our response and C is typically the result).
You should understand that Charles Dow never used his theory nor did he ever represent it as some sort of system to predicting the markets. My interpretation is that William Hamilton was successful with the theory because he used it to plot the economies location, and then used the relatively predictable economic map (cycle) to determine what was next.
I use technical analysis in my investment practices, but more for a “where are we now” purpose and not an eight ball in decision making. It would seem to me that sometimes technical analysis is a self fulfilling prophecy, the more who believe it the more you have a movement (at least in the short term). For that reason alone I feel you cannot disregard it but understand how one of the Fathers of Technical Analysis viewed it.
I would definitely recommend reading an unabridged copy of “The Dow Theory” by Robert Rhea. The book is only about 100 pages with an additional appendix of 100 plus pages of reprinted articles from William Hamilton’s Wall Street Journal column. The Dow Theory to me is definitely one of the best ways to gauge the market sentiment and where we are in the economic cycle.
Tags: chart, Dow Theory, stock, technical analysis
