Technical analysis is based on the Dow Theory, which rests on a number of fundamental assumptions:

	1.	Price is a comprehensive reflection of all market forces. All the fundamental indicators described above almost immediately find expression in market pricing.
	2.	Price movements are trend followers. There are three types of trends: primary, secondary and daily fluctuations. Primary trend: A primary trend remains in effect until definitive signals prove otherwise. Secondary trend: A secondary trend reacts against the primary trend, and is a temporary phenomenon. In a bull market, a secondary trend is called a correction; in a bear market secondary trends are sometimes called reaction rallies. A secondary trend can retrace up to 2/3 (usually 50%) towards the starting point of the trend before resuming its primary course. Daily fluctuations: There is very little opportunity for forecasting daily fluctuations. Overemphasis on daily fluctuations can easily lead to loss.
	3.	Primary trends are composed of three stages: accumulation/distribution, run-up/run-down and irrational pessimism/optimism. Accumulation/distribution: During the first stage, knowledgeable traders buy/sell stocks against consensus. Run-up/run-down: This is the longest stage of the cycle. The market begins to move, the trend is identified and trend followers jump aboard/bail out. Irrational pessimism/optimism: Run-up/run-down is the longest stage of the cycle. At some point, investors experience irrational exuberance/despair, and the knowledgeable investor will distribute/buy holdings in anticipation of the start of a new cycle.
	4.	The volume of trades must confirm the trend. Movement on low volume trades can be attributed to many different ephemeral factors; high volume movements are indicative of the true direction of the market.