Monday, May 27, 2024

Back to "divergent" interpretations of the Dow Theory


Setting Dow Theory concepts straight amidst so much "fake" Dow Theory.

Recent Transport weakness relative to the Dow Industrials prompted many “experts” to proclaim that this is a bear market signal. Let’s clarify the concepts.

First, divergence and lack of confirmation, while similar, are not the same and have different implications. Divergence entails one index being higher, whereas the other is lower.

Lack of confirmation means that one index makes a higher high (or lower low), and the other index fails to break out while agreeing in direction.

Rhea studied divergences; contrary to common wisdom, they don’t question the current trend. Normally, they are resolved in favor of the existing trend. Mark Hulbert recently provided data confirming this assertion (see chart below). 

Lack of confirmation merely serves as a yellow light that may question the persistence of the current trend, but it is NOT, as many purport, a signal showing a change in the trend.

Finally, most Dow Theorists are fixing their eyes on the wrong relevant highs. All-time highs (lows) are not necessarily the relevant highs to be surpassed by both indices. In most instances, relative highs (or lows) are the appropriate vital levels to watch.

Therefore, most analyses we read will likely do more harm than good to our portfolios.

These old posts shed more light into what I call “heretical” (or plain wrong) interpretations of the Dow theory:

To close, I'd like to stress that most Dow Theorists don't back their questionable assertions with a track record. You can find ours HERE.



Manuel Blay

Editor of

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