Continued from...Bull and Bear period definition and forecasts.
Synchronizing the Price MovementIt has been said before that Dow's theory is in no sense to be regarded as a gambler's system for beating the game. Any trader would disregard it at his peril, but Dow himself never considered it in that light, as I can testify from many discussions with him. I was writing the stock market paragraphs of the Dow-Jones news service and The Wall Street Journal in those days, and it was, of course, essential that I should thoroughly understand so scientific a method of synchronizing the market movement. Many men in Wall Street knew Dow and set their experience at his service. His mind was cautious to a fault, but logical and intellectually honest. I did not always agree with him and he was oftener right than I. When he was wrong it was clearly from lack of accurate data such as is now available.
Necessary KnowledgeIt would perhaps be well to point out here that a knowledge of the major movement of the market, whether up or down, is necessary for the successful flotation of any largely capitalized enterprise. In a future discussion it will be convenient and highly interesting to illustrate, from James R. Keene's own admissions, how he distributed Amalgamated Copper to an oversanguine public at a time when the Boston News Bureau, to its everlasting honor, was warning New England investors to have nothing to do with that property at anything like the prices asked, or allow themselves to be deceived by the quarterly dividend of 1½ per cent and a half per cent extra. That rate was retained at a time when The Wall Street Journal was openly calling the company a "blind pool," and showing, as the Boston News Bureau had shown, that neither the conditions of the copper trade nor the capitalization itself justified the flotation price. But Keene could never have distributed the stock except during the known major swing of a great bull market. He had exactly the same condition to help him in the much more formidable, and creditable, task of distributing the enormous capitalization of the United States Steel Corporation. That stock could never have heen sold, and its sale would never have been attempted, in the subsequent bear market of 1903.
An Instructive EditorialIt would be unfair to Dow if the reader were not given the opportunity of extracting for himself some light on Dow's own application of his theory, or at any rate some idea of his method in the series of editorials which, as I have said before, dealt primarily with stock speculation as such and only incidentally with rules for reading the market. Here is an editorial, almost in full, published on July 20, 1901, only ten weeks after the panic which resulted from the Northern Pacific corner. At the time he wrote he did not see clearly that it was not a culmination of a major swing but a peculiarly violent secondary reaction in a primary brill market. He speaks first of individual stocks:
"There is what is called the book method. Prices are set down, giving each change of one point as it occurs, forming thereby lines having a general horizontal direction but running into diagonals as the market moves up and down. There come times when a stock with a good degree of activity will stay within a narrow range of prices, say two points, until there has formed quite a long horizontal line of these figures. The formation of such a line sometimes suggests that stock has been accumulated or distributed, and this leads other people to buy or sell at the same time. Records of this kind kept for the last fifteen years seem to support the theory that the manipulation necessary to acquire stock is oftentimes detected in this way.
Another method is what is called the theory of double tops. Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance.
Those, however, who attempt to trade on this theory alone, find a good many exceptions and a good many times when signals are not given".
From The Stock Market Barometer by William P. Hamilton, published in 1922
|Dow's Theory, Applied to Speculation||Bull and Bear Period Definition and Forecasts|
|Dow's own application of his Theory||Trading on Averages|