He was a reporter and editor most of his life, which ended in 1902. In his starting out years he worked for the famous newspaper man Samuel Bowles, who had the distinction of demanding that a reporter put it all in the first sentence of a news story—who, what, when, where, and why—a widely used practice today in journalism, including Internet news stories.
Charles Dow’s market observations, as presented in a series of Wall Street Journal editorials, were highly original and insightful. I find them a worthwhile inclusion even in this introductory book on technical analysis, because it helps understand the practical underlying rationale for technical analysis—a descriptive term unknown in Dow’s day.
Also occurring in the 1880s and 1890s was Charles Dow’s formulation of the first stock market averages, which became, over time, the Dow Jones 30 Industrial, 20 Transportation and 15 Utility stock averages known today.
I tend to call the 30 Dow Industrial stocks, the Dow 30 as these stocks have become more technological, manufacturing, and service oriented and less industrial, unlike the case of the heavy industry stocks like U.S. Steel that were part of the early Dow Industrial average. Today, common parlance is the Dow, the Dow Jones or the Dow 30 stock average. This average of 30 stocks is not capitalization weighted, as is the case of the Standard & Poor’s 500 or Nasdaq Composite indexes. Dow stocks of companies that have become price laggards, even if they’re much smaller than, for example, General Electric, will have a dragging effect in the equal weighted Dow 30 average, unlike indexes that give more weight to larger companies—by the way, only GE was an original member of this average and still is.
Only the Dow Industrials and Dow Transportation (then a group of railroad stocks) averages are used in what became known as “Dow theory.” Charles Dow never called the market principles he wrote about “a theory,” only observations on how the economy and the market functioned. Charles Dow’s principles were later discussed in a book by the Wall Street Journal editor succeeding Dow, William Hamilton, that was called The Wall Street Barometer. Robert Rhea is credited with distilling the ideas of Dow further and wrote a book in the early 1930s called Dow Theory.
This background given, I will describe the basic tenets of Charles Dow and discuss their continued present-day relevance. Robert Edwards and John Magee, who wrote what many consider to be the bible of technical analysis, The Technical Analysis of Stock Trends, popularized the description and analogy of market trends to “tides, waves, and ripples,” although these terms did not originate with them.
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