Dow Theory, Indian Equity Market and near future possibilities
Posted by dipanksaha on March 5, 2007
Dow theory is considered as the father of all modern day technical analysis. According to the theory, if Industrial Average and Transport Average break any crucial support or any crucial resistance then market is expected to show some definite direction. Until and unless both of the averages moving in synergies, no trend is confirmed. But this technique was meant for US equity market and averages under consideration are Dow Jones Industrial Average and Dow Jones Railroad/transport Average.
Other than the technicalities, Dow theory also considers fundamental valuation as mode of trend identification, though Robert Rhea latter lowered the stress on fundamental valuation arguing that average discounts everything.
But in its true form I have hardly seen anybody applying Dow theory in Indian equity market. If we consider the valuation front, then economic health is still intact. GDP growth projection is optimistic; there is no dearth of demand. Only matter of concern is inflation, but that too under control to the large extent. So still there is hardly any economic malfunctioning ahead. But Rhea has said, “ Average discounts everything”. And if we have to follow his advice we can say our economy is going to hit a submerged iceberg, since nifty 50 has broken 3754 and closed below that, the last crucial high attained by it on 10th May’ 2006.
I am not confident on my finding. As I have not applied Dow theory in its original form. Besides that today’s markets are highly globalized, market participants are too emotional and noise is much more than earlier days. But if I am right and Dow theory succeed this time also, then we are just on the threshold of month long bear run. I still believe bullishness is intact at least for Indian market and bear can rule for short to medium term only. Let’s watch the market with fingers crossed.
