The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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Introduction to Dow Theory


potential change in the direction of the trend. It also represents a technical sell
signal. Note that the non‐failure swing formation provides a more conclusive
sell signal at the penetration of the second or lower support level, rather than
at the first higher support level. This is because the formation was still in the
process of making a higher peak, so more evidence is required to ascertain
that a potential trend change is indeed on the way. Nevertheless, many traders
use the first higher support level to scale in or out of some positions, with the
remainder of the position scaled in or out at the breach of the second lower
support level.
The three basic bottom reversal formations are illustrated in Figure 2.19. The
same rationale applies except in reverse.

the averages must Confirm One another
In Dow Theory, there is a requirement that both the Industrials Average and the
Railroad Average must extend beyond their secondary peaks in order for a trend
to be established, that is, the trend in one average must be confirmed by the other

fIgure 2.18 Top Reversal Patterns.

fIgure 2.19 Bottom Reversal Patterns.
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