Linda Raschke – The Dow Theory Still Holds Water

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Author: Linda Raschke

Linda discusses five choice trading patterns she uses. Based on a logical set of market principles, these five patterns work equally well in equity and commodity markets. Understanding these enduring market setups provides you with a solid foundation for trading technically. They simplify analysis for the beginner and give the aggressive trader added confidence. Linda has used these patterns as the core of her intermediate-term analysis but they work well on any timeframe.

The Dow Theory Still Holds Water

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The beginning of a primary upward (or downward) trend in a bull (or bear) market is known as the accumulation phase. Here, traders enter the market to buy (or sell) stocks against common market opinions.
In the public participation phase, more investors enter the market as business conditions improve and positive sentiments become evident. This results in higher (or lower) prices in the market.
The panic phase is marked by excessive buying by investors. This could result in great speculation. At this stage, it is ideal for investors to book profits and exit.
Indices confirm each other
A trend in the market cannot be verified by a single index. All indices should reflect the same opinion. For example, in case of a bullish trend in India, the Nifty, Sensex, Nifty Midcap, Nifty Smallcap and other indices should move in the upward direction. Similarly, for a bearish trend, all indices should move in a downward direction.
Trends are confirmed by volume
The trend in the market should be supported by trading volumes. For instance, in an upward trend, the volume rises with increase in price and falls with decrease in price. And in a downward trend, the volume increases with fall in price and decreases with price rise.
Trends continue until definitive signals indicate otherwise
The theory says that market trends exist despite any noise in the market. That is, during an upward trend, a temporary trend reversal is possible but the market continues to move in the upward direction. In addition, the status quo remains until a clear reversal happens in the market.
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