Dow Theory

When it comes to Dow Theory, we have to carefully monitor the market to see if we get a clear sign of a non-confirmation of the trend. A non-confirmation of the trend can take place in many ways and is most prominent when one index goes up while the other goes down. Anyone interested in Dow Theory must be vigilant for signals that might indicate that a reversal of the primary or secondary trend is in the offing.

On Friday August 21, 2009, the Dow Jones Industrial Average (^DJI) exceeded the prior high of 9398.19 set on Wednesday August 12th. Unfortunately, the Dow Jones Transportation Index (^DJT) are lagging in the ability to exceed the high of 3774.12 set on Thursday August 13th. The only thing that favors the Transports in this instance is the fact that on a percentage basis the Transports rose 2.58% versus the Industrials 1.67% increase. This indicates that there is relatively strong interest in the Transports. Hopefully this enthusiasm will spill over into today's trading.

If the Transports do not break above the August 13th high then we might be on track for a non-confirmation. A non-confirmation means that the recent upward trend in the market will be coming to an end soon. Conversely, if the Transports break the indicated high while the Industrials move moderately higher then we could be in good shape for the short term.

Dow Theory Q & A

Q.When looking at a chart with weekly Dow prices, how is the weekly price calculated? Is it the Friday close or is it an average of the whole weeks close?

A. In all my readings of Dow Theory, I cannot remember anyone suggesting the use of weekly data for analysis. This doesn't mean that weekly data isn't useful, you might see a consistent pattern that I would otherwise overlook. Dow Theory is supposed to be calculated by using the closing price for both indices on a daily basis. I have bastardized Dow Theory by taking the high and low price of a given period as a way to get a sense of herd mentality or market psychology. This is in contrast to taking only the closing price.

Depending on the source, weekly data is calculated using the opening price from the open on Monday, the high and low price is from whichever days in the week that had either number and the closing price from the Friday close. An average of the week isn't how the weekly closing price is calculated. Touc.

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