Charles Dow developed a series of principles for understanding and analyzing market behavior known as Dow Theory. This theory is the foundation of the study of technical analysis.
Charles Dow believed that prices moved in waves or trends. He believed tides or primary trend are made of waves which is intermediate trend and waves constitute small ripples or short term trends or minor trend. This may seem like a simple concept but it is part of the foundation of the modern study of trends in stock prices.
- Primary(Long term: Year or longer): The Tide in Dow’s explanation
- Secondary(Intermediate: One to three months): The waves
- Minor(Short term: Less than a month) The ripples
Trends are affected by the next longer and next shorter trend. A rising long term trend causes the intermediate trend to have larger rallies and smaller retracements and the short term trend causes the intermediate trend to correct and continue.
A falling long term trend causes the intermediate trend to have smaller rallies and larger retracements while the short term trend, again, causes the intermediate term trend to correct and continue.