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Dow Theory
Dow Theory is one of the oldest frameworks in technical analysis, developed from Charles Dow’s writings in the late nineteenth century and later formalized by other analysts after his death.
At its core, it holds that markets move in identifiable primary trends – lasting months to years – within which shorter secondary trends and minor daily fluctuations occur.
One of its most important principles is confirmation: a trend signal in one major index should be confirmed by another before it’s trusted. In Dow’s time, that meant the Dow Jones Industrial Average and the Dow Jones Transportation Average moving in the same direction.
If industrials were rising but transports weren’t, the move was considered suspect. It also holds that trends remain in place until there is clear evidence they have reversed – a deceptively simple idea that underpins much of modern trend-following.
Example: An analyst notices the industrial index making new highs, but the transportation index is lagging and still below its previous peak. According to Dow Theory, divergence is a warning – the rally lacks confirmation, and the primary trend may not be as healthy as the headline numbers suggest.
Down Tick
A down tick refers to a transaction that occurs at a price lower than the immediately preceding trade in the same security. It is the smallest possible unit of bearish price movement; a single trade that nudged the price downward, even if only by a fraction. The concept became particularly important in the context of short-selling regulation.
For much of the twentieth century, US rules required that short sales could only be executed on an uptick or a zero-plus tick; a rule designed to prevent short sellers from piling onto a falling stock and accelerating its decline.
That uptick rule was abolished in 2007 and partially reinstated in modified form after the 2008 crisis.
Down ticks are also used in market microstructure analysis, where the ratio of up ticks to down ticks over a period can offer insight into the underlying buying and selling pressure in a stock.
Example: A stock is trading at $45.20. The next trade goes through at $45.18. That is a downtick; a small move, almost invisible in isolation, but when downticks begin to consistently outnumber upticks throughout a session, it tells a story about who is in control of the tape.
Downtrend
Downtrend refers to a market that is fashionably establishing steadily lower highs and lows over time. That is the technical definition, and it is worth retaining since it is more accurate than merely stating that a price is falling.
One bad day is not a downtrend. A short-run pullback in an uptrend is not a downtrend. A downtrend is a directional movement in which every attempted recovery fails to reach the previous peak, and each subsequent sell-off undercuts the previous trough.
Traders use this to make decisions: in a confirmed downward trend, rallies are more likely to be selling opportunities than signs of a turnaround.
Downtrends occur in all timeframes, be it intraday charts or longer-term price history, and can affect individual stocks, sectors, currencies, or even whole markets.
Example: A technology stock records poor performance in January, crashes, then in February sees a half-baked recovery but fails to regain the January level, and then again in March falls to a new low.
That would be a sequence of lower highs, lower lows, which is a downtrend in the making, and technically, the trader would take any bounce with a grain of salt until the pattern breaks.
Dragonfly doji
A dragonfly doji is a specific type of doji candlestick where the open, high, and close are all at or near the same level, with a long lower wick extending well below the body. It looks like the letter T on a chart.
The shape shows that sellers pushed the price significantly lower during the session, but buyers stepped in and drove it all the way back up to where it opened by the close. Neither side ultimately won, but the buyers clearly showed up when it mattered.
When a dragonfly doji appears after a downtrend, at a known support level, it can be a meaningful signal that selling pressure is exhausting itself and a reversal may be forming. Like all candlestick signals, it carries more weight when confirmed by the following session’s price action.
Example: A currency pair has been falling for several days and hits a major support level. That session closes as a dragonfly doji – sellers tried hard, buyers absorbed everything, and pushed back. The next day, the pair opens higher and continues rising. The dragonfly, in hindsight, marked the low of the move.
Drawdown
The peak-to-trough decline in the value of an investment or trading account.
Dry powder
Dry powder are cash or cash-equivalent assets that are in reserve and are deliberately undeployed. The word comes from the ancient military art of storing gunpowder in a dry place so it would be ready to be fired when the time came. In the financial sense, the meaning is essentially the same.
Dry powder is capital that is yet to be put to work, but is held in reserve awaiting the appropriate opportunity. When applied to private equity and venture capital, it specifically refers to committed but uncalled capital; money that the investors have promised to a fund, but such that the fund manager has not yet drawn down or invested.
In a broader market sense, it refers to any investor or institution that has a lot of cash sitting idle while it awaits an opportunity to improve or a valuation that looks more appealing.
The dry powder is, in most cases, a strategic decision rather than an indication of indecisiveness.
Example: In early 2022, a private equity fund completes a $2 billion raise, only to see markets begin to sell off. Rather than rushing to invest the capital in an overheated market, the manager withholds much of it.
By the end of 2023, there will be considerable compression in valuations. The dry powder that appeared to be a moment of hesitation turns out to be positioning; the fund can now purchase assets at a price that would not have been available a year ago.
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