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. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Middle Market

    Definition of middle market
RELATED FAQS
  1. How is the Dow Jones Industrial Average used in the Dow theory?

    The Dow Jones Industrial Average (DJIA) is used in the Dow theory as a confirmation of strength or weakness in the Dow Jones ... Read Full Answer >>
  2. What are the best technical indicators to complement the Uptick Volume?

    In technical analysis, uptick volume is almost always used in conjunction with downtick volume to measure net volume or the ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!