Modern technical analysis or does the Dow Theory still holds?

I have been thinnking lately about the technical analysis in general. I mean thinking about the very foundation of the technical analysis the Dow Theory. For those who are not really familiar with the Dow theory I suggest the Wikipedia link.

I write this because I had some very deep doubts about the Dow theory in general.

I think that the Dow theory is a particular case of market behaviour and not the general way the markets will have to behave in the future.

Here I would like to add two screen shots on the daily chart of the EUR/USD.

Here I will only include two tenets of the theory:

I use exerts from the Wikipedia article with some minor comments.



1. The market has three movements

(1) The "main movement", this is the primary movement or major trend and it may last from less than a year to several years. The main movement can be bullish (we can say we have a bull market) or bearish (bear market).

(2) The "medium swing", is a secondary reaction or intermediate reaction (that means a counter trend movement or opposite of the main trend movement) may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement.

(3) The "short swing" or minor movement it varies with opinion from hours to a month or more. Those three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

In the modern talk we can say we have self similarity as nested elements. However at the time of Dow this vocabulary did not exist.

2. Market trends have three phases

Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority demanding (absorbing) stock that the market at large is supplying (releasing). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

Look at the chart and in whic chart that holds true:

Take a look again at those chart. For the first chart we can say how easy it is. The market behaves according to the Dow Theory.

We see the primary trend, we see the secondary trend. We see the corrections. All that is very nice looking.

You may be a technical trader you are going to make it. If you are going to be a fundamental trader you are going to make it, I do not thing your fundamental analysis would favour taking positions against the trend. If you use a well diversified portfolio in the Stock market you are going to be very well money would keep coming in the bank.

We know that we cannot know the future we can make forecasts based on models, but if the very model is going wrong what is going to happen.

Look at the second chart now. Where is the trend. We have some kind of a different movement. With a minimum of imagination you are going to see trends. But comme on that second picture has nothing to do with the first one. Of course you can fit any market in the Dow model but doing so you may distort the reality and eventually that would affect your bank account in one way or another.

I think that if you want that your trading account and after all your bank account is healthy your models need to cope with reality. However the Dow Theory is a too breautiful model that we just cannot allow ourseles to let it die.