Objective of the dow theory is Identifying the trend in other words to find the demand and supply. Line chart used for dow theory, minimum look up period is 2 years on daily basis, duration of trend for dow theory is 2-3 months. We have to take the line chart of the any company and mark the major tops and bottoms. Then identify the higher bottom/top and lower top/bottom with comparing to previous top/bottom. Following criteria will help us determine the market trend.
1.Higher bottom – higher top / Demand / with high volume/ Bullish
2.Lower top – lower bottom/ Supply / with high volume / Bearish. When the demand is greater than the supply the price increases and after reaching a certain level the supply increases as a result the price falls. This zone is known as resistance. When the price falls supply is greater than demand it reaches a level where the demand increases and this zone is known as the support.