Dow Theory: Market Indexes Must Confirm Each Other
AAA
  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion

Dow Theory: Market Indexes Must Confirm Each Other

By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

Under Dow theory, a major reversal from a bull to a bear market (or vice versa) cannot be signaled unless both indexes (traditionally the Dow Industrial and Rail Averages) are in agreement.

For example, if one index is confirming a new primary uptrend but another index remains in a primary downward trend, it is difficult to assume that a new trend has begun.

The reason for this is that a primary trend, either up or down, is the overall direction of the stock market, which in Dow theory is a reflection of business conditions in the economy. When the stock market is doing well, it is because business conditions are good; when the stock market is doing poorly, it is due to poor business conditions. If the two Dow indexes are in conflict, there is no clear trend in business conditions. (For related reading, see Forces That Move Stock Prices.)

If business conditions cause the major indexes to travel in opposite directions, this disparity suggests that it will be difficult for a primary trend to develop. When trying to confirm a new primary trend, therefore, it's vital that more than one index shows similar signals within a relatively close period of time. If the indexes are in agreement, it is a sign that business conditions are moving in the indicated direction. Thus, rising indexes signal a new uptrend.

Dow Theory: Volume Must Confirm The Trend

  1. Dow Theory: Introduction
  2. Dow Theory: The Market Discounts Everything
  3. Dow Theory: The Three-Trend Market
  4. Dow Theory: The Three Phases Of Primary Trends
  5. Dow Theory: Market Indexes Must Confirm Each Other
  6. Dow Theory: Volume Must Confirm The Trend
  7. Dow Theory: Trend Remains In Effect Until Clear Reversal Occurs
  8. Dow Theory: Dow Theory Specifics
  9. Dow Theory: Current Relevance
  10. Dow Theory: Conclusion
RELATED TERMS
  1. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
  2. Current Liquidity

    The total amount of cash and unaffiliated holdings compared to ...
  3. Developed To Net Premiums Earned

    The ratio of developed premiums to net premiums earned over a ...
  4. Return On Policyholder Surplus

    The ratio of an insurance company’s net income to its policyholder ...
  5. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
  6. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  1. What does a mutual fund's beta coefficient measure?

    Evaluate the risk associated with a particular mutual fund by determining its beta coefficient, which illustrates the fund's ...
  2. Are Bollinger Bands® useful for analyzing highly volatile securities?

    Discover how the dynamic nature of Bollinger Bands makes them a very useful indicator for securities that have historically ...
  3. How do traders identify key signals from the autoregressive moving average?

    See how traders and technical analysts use autoregressive moving averages to create forecasting models, and learn why this ...
  4. What metrics should I evaluate when looking for high-yielding dividend stocks?

    Evaluate high-yield dividend stocks to determine if they are a good investment to produce steady income. Learn what questions ...
Related Tutorials
  1. Trading Strategies

    Basics Of Technical Analysis

  2. Investing Basics

    Industry Handbook

  3. Fundamental Analysis

    Ethical Investing Tutorial

  4. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  5. Fundamental Analysis

    Discounted Cash Flow Analysis

Trading Center