Dow Theory: Market Indexes Must Confirm Each Other
  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. Dow Jones U.S. Market Index

    A market-capitalization-weighted index maintained by Dow Jones ...
  2. Dow 30

    Commonly referred to as just the "Dow," the Dow 30 was created ...
  3. Dow Theory

    A theory which says the market is in an upward trend if one of ...
  4. Broad-Based Index

    An index designed to reflect the movement of the entire market. ...
  5. Price-Weighted Index

    A stock index in which each stock influences the index in proportion ...
  6. Dow Jones Global Titans 50 Index

    A market capitalization-weighted index of 50 of the largest multinational ...
RELATED FAQS
  1. How is the Dow Jones Industrial Average used in the Dow theory?

    Discover how the Dow Jones Industrial Average is used in the Dow Theory, which is used by traders to figure out the trend ... Read Answer >>
  2. What are these points that the Dow is always gaining or losing?

    The Dow is a list, or index, of companies considered to be good indicators of the market's strength. Simply put, these companies ... Read Answer >>
  3. Can you buy shares in the Dow Jones Industrial Average (DJIA)?

    Invest in the Dow Jones Industrial Average index through index funds or ETFs. Read Answer >>
  4. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ... Read Answer >>
  5. Is the Dow Jones a stock exchange?

    Learn about the Dow Jones Industrial Average and its impact. This historically significant index provides a daily snapshot ... Read Answer >>
  6. When can you trade the stocks in the Dow Jones Industrial Average (DJIA)?

    Find out when you can trade shares linked to the Dow Jones Industrial Average during NYSE and Nasdaq trading sessions. Read Answer >>

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