The Principle of Confirmation can save your skin. Example 1. Dow Transportation breakdown

The Principle of Confirmation can save your skin. Example 1. Dow Transportation breakdown

One fundamental tenet of the Dow Theory holds that the movement of one index, when not confirmed by another, should be disregarded. This principle underscores that a Buy or Sell signal originating from one index, such as surpassing a prior high or breaking down below a previous low, carries no significance if it lacks validation from another index.

A recent instance illustrating the significance of this principle involves the Dow Transportation (DJT) index. The trend has been bullish since 11/8/22. On 4/26/23, the DJT broke below the last recorded secondary reaction lows. However, the DJI (or the S&P500, for that matter) did not confirm. Such a breakdown was bearish, but unconfirmed did not have the power to reverse the trend. Hence, no Sell signal was given, and we continued being long stock indexes. The breakdown was a fake out, and thereafter all Indexes rallied higher until the last recorded bull market highs (green horizontal lines) were jointly bettered, and our 11/8/22 Buy signal was confirmed. All in all, the principle of confirmation helped us avoid a false sell signal and a nasty whipsaw.

The accompanying charts visually represent the price movements in question.



It’s worth noting that the principle of confirmation extends beyond the confines of the Dow Theory. As I expounded upon HERE, it finds application in other trend-following techniques, including moving averages. Additionally, there are indications that it holds relevance in the realm of cryptocurrencies. It’s important to note that my assessment is preliminary, as I would prefer a more extensive dataset, given that cryptos have a relatively short history. However, thus far, the principle seems to hold true.


Manuel Blay

Editor of thedowtheory.com

Back To Top