Dow’s analysis and the investors psychology towards announcements

Keynes himself asserted in its main book, the Theory of employment, interest and money (1936) that “most investors and professional speculators care less about making precise previsions in the long term than forecasting just before the public the upcoming changes on the conventional evaluation scale”. This approach follows initial Dow’s analysis, the creator of the eponymous index and of the Wall Street Journal. Dow’s theory is a core aspect of technical analysis and is worth developing.



Indeed, Dow understood among the firsts the importance of “timing” and reactivity. Its model lies on the idea that, when stocks are heading down, there will always be more aggressive and better informed investors ready to buy stocks in prevision of the recovery (“aggressive buyers”, step "a" in the graph), while individuals are getting rid of their shares. Following this period is the improvement of the company’s results, having investors become more attracted by the stock (“accumulation”, step "b"). This amelioration phase is then likely to put very high buying pressure on individuals, willing to take part in what they consider an everlasting movement. This period is for the first investors an occasion to sell (“distribution”, step " c ") , forecasting the upcoming reversing

These different analyses come from essential points, which need to be clearly defined. Though every investor conceives the prices up or down concepts, it still needs to be understood how this expresses itself graphically and in prices.

For example, an upward trend is characterized by ever-higher lows while a downward trend is characterized by ever-lower highs.

This approach of trends can appear trifling but it really is essential to integrate the principles of the technical indicators construction.