InvestorQ : What is meant by Tides, Waves and Ripples in Dow Theory and how do we interpret?
Jignesh Gupta made post

What is meant by Tides, Waves and Ripples in Dow Theory and how do we interpret?

Answer
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Maniish Lofar answered.
1 year ago


Before we get into the specifics of the Dow theory let us take a live macro example. Assume that the Indian GDP is likely to shift up from 7% to 8% real growth and the profit growth of Indian companies in the coming quarter is likely to improve from 11% to 14%. At the same time, there is going to be short term volatility caused by the uncertainty surrounding the talks on the trade war between the US and China and the Fed action on rates. Here we can intuitively see three trends building up that emanates from different time period implications. These trend lengths are what Dow Theory is all about and based on their length and implication, these trends are referred to as Tides, Waves and Ripples.

For example, the Primary (Long term: Year or longer) is referred to as the Tide in Dow Theory. In the above case, the Tide is strong and positive because the GDP growth is likely to be touching a higher plane and that should be positive for the markets in the medium to long run. Then comes the Secondary (Intermediate: One to three months). These trends are also called waves. In the above illustration, it is the quarterly earnings which are likely to improve that will be the quarterly trend to monthly trend and will again be positive. Such trends are normally reflected in the charts well in advance. Finally, there is the Minor (Short term: Less than a month) trend, which is also called Ripples of a very short term nature.

Trends are affected by the next longer and next shorter trend. A rising long term trend causes the intermediate trend to have larger rallies and smaller retracements and the short term trend causes the intermediate trend to ebb and flow. A falling long term trend causes the intermediate trend to have smaller rallies and larger retracements while the short term trend, again, causes the intermediate term trend to ebb and flow.