The Dow Theory was based on a series of editorials Charles Dow wrote between 1899 and 1902 in his paper, The Wall Street Journal. Dow believed that in the long run, stock prices reflected value, but he also believed that stocks moved in patterns that could be predicted by studying price and volume trends. For example, in a major uptrend, stocks or indexes close at successively higher highs and higher lows than in the previous bull market.

After his death, Dow’s essays were interpreted and expanded upon by followers including William Hamilton, Robert Rhea and E. George Schaefer. Their writings came to be known as Dow Theory and formed the basis for technical analysis of the markets.

Among other things, Dow Theory holds that for a price trend to be significant, it must be accompanied by strong trading volume. It also states that everything that is currently known about a company is reflected in its stock price (the basis of the efficient theory.) One of its major tests: For a major trend to take hold, both the Dow Jones Industrial Average and the Dow Jones Transportation Average (originally called the Rail Average) must be moving in the same direction.