We're going to finalize our review and application of the Dow Theory today be taking
a look at the third piece of the Dow Theory puzzle. That third piece is the idea of
confirming the reversal with a specific chart pattern.
Since the Dow Theory builds on itself, let's review what we've already covered in
previous TrendWatches. In the April 29th TrendWatch
(http://63.147.211.35/document.jsp?documentid=1147) we learned that the Dow
Transportation Average chart will either lead or lag the Dow Industrial Average
chart, but one should follow the other to confirm a new trend. If they move in
different directions, then stocks are due for a correction. In the May 8th TrendWatch
(http://63.147.211.35/document.jsp?documentid=1158) we learned that volume must
increase in the direction of the trend if the trend is to be supported.
Today we'll be rounding out the theory by explaining the third idea - how to confirm
the new trend once the first two pieces of the theory have been satisfied. This one
is simple. To confirm the new trend, you must make a higher high and a higher low. Of
course, the question is "Higher than what low and what high ?". Since this is a
theory designed to spot major trends, we'll stick with weekly charts to answer that
question. On these weekly charts, we obviously want to break through the falling
resistance lines (in red). But we also want to cross above recent peaks, and not fall
as low as recent bottoms. These tops and bottoms have been marked with dashed lines
on the chart below.
Dow Industrials & Dow Transportations with Volume - Weekly
Of course, to test the current trend, stocks will have to fall substantially to see
where investors start buying again. For the Dow Industrials, that bottom occurred in
March at 7416. So, for this uptrend to be verified as bullish, we can't fall below
that low. We'll also have to break above December's high around 9040. Failing to do
either one of those keeps the current upturn in question.
On top of that, we apply the same criteria to the Dow Transportation Average. The
Transports have already broken above December's highs around 2425. Now we'll want to
see the transportation average fall no lower than March's low of 1918 (but we do want
to see it fall just so we can apply the test).
This is tough to internalize for some people, since falling stocks are inherently
headed the wrong direction. However, it's a necessary evil to really test the
strength of the market and the conviction of stock-buyers. Anybody can be bullish
when stocks are rising, but only a real bull trend will recover and make new highs
following a sell-off.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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