By going back and reviewing the work of the early pioneers of technical
analysis, we can gain a better perspective into analyzing and trading modern
markets. One of the best known of these pioneers was Charles Dow, who wrote
a series of columns in the Wall Street Journal in the early 1900s which were
later codified into what is known as Dow Theory. Dow placed great emphasis
on identifying the primary trend through the use price pattern, and through
confirmations between movements in the indexes. Dow theory is thus
considered the earliest form of 'trend following.' Dow theory incorporates
a number of specific tenets. Dow believed that the averages discounted all
news and fundamentals, and that the averages foreshadowed the health of the
economy and business in general. Dow also broke market movements into three
categories, known as the primary or long-term trend, the secondary or
intermediate-trend, and the short-term or daily fluctuation. In addition, a
change in primary trend is signaled when the Industrial and the
Transportation averages confirm each other. Conversely, the primary trend
would be unconfirmed if one average makes a 'higher high' while the other
average fails to make a higher high. Dow also studied the relationship
between the secondary movements and volume. He found that volume generally
declined on secondary corrections within a primary trend. We can use many
of Dow's concepts in our own trading today, even on a very short-term basis
in markets such as the S&P futures. For example, we can look for
confirmations and divergences between the S&P and the Dow or Nasdaq futures.

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