The Dow theory is a theory that says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time. Like in candlesticks, there are few important patterns in Dow Theory as well. The trader can use these patterns to identify trading opportunities. Some of the patterns that we will study are:
The Double bottom & Double top formation
The Triple Bottom & Triple Top
Range formation, and
Flag formation
The support and resistance is also a core concept for the Dow Theory, but because of its importance (in terms of placing targets and stop loss) we have discussed it much earlier a chapter dedicated to it.