Introduction to Dow Theory
volume must Confirm the trend
In Dow Theory, volume has to increase or expand in the direction of the existing
trend, that is, volume has to confirm the trend. If volume does not expand in the
direction of the existing trend, then this is seen as a sign of weakness in the trend
and may potentially lead to a weakening or reversal of the existing trend. It should
be noted also that volume is considered to be a secondary indicator.
Expanding in the direction of the existing trend means that:- In an uptrend, volume should be increasing.
- In an uptrend, volume should be decreasing during a downside retracement.
- In a downtrend, volume should be increasing.
- In a downtrend, volume should be decreasing during an upside retracement.
If any of the four conditions listed above is not met, the existing trend may be
potentially weaker than expected and may lead to a reversal in the existing trend.
In Figure 2.25, we see volume, in area A on the chart, expanding in the direction
of the existing primary bull trend in gold. Notice that on average, volume has
declined during the retracement phase, as seen in area B on the chart. This is es-
sentially a bullish indication for gold. We therefore expect more upside moves in
gold over the longer term.
Figure 2.26 illustrates the volume action associated with the primary bull trend
between 2006 and 2010 in the GLD SPDR Gold Trust Shares. We see volume ex-
panding in the direction of the trend in period 1, 3, 7, and 9. For periods 2, 4, 6, 8,fIgure 2.25 Volume Expanding in the Direction of the Existing Primary Bull Trend
in Gold.
Courtesy of Stockcharts.com