INTERPRETATION

Dow theory is based on a set of articles written by Charles Dow in Wall Street Journal. After his death, his followers assembled a theory based on his researches.It is the basis of Technical Analysis and all the modern theories are modeled from it. Dow theory makes us understand demand and supply and therefore predict the market.
The basis of Dow theory is that market moves in trends. To determine the market trend, one has to take at least two years data, then make a line chart out of it. Then we have to identify the peaks and valleys and mark them as tops and bottoms. When a top rises above the previous, then it is a higher top, If it lowers than the previous one, then it is a lower top. The same way for bottoms too. If the sequence consists of higher tops and higher bottoms then the trend is bullish. If the sequence is filled with lower tops and lower bottoms, then it is a bearish trend.
If you find higher bottom and higher top sequence with a good volume, it is good for buying.
If you find lower bottom and lower top sequence with a good volume, it is good for selling.
Even the authors of Dow theory did not guarantee that it is a 100% fool-proof theory. It is looked upon as a set of guidelines and principles to assist investors and traders with their own study of the market.