V.9:7 (288-292): Dow Theory Confirmation And Divergence by Richard L. Evans

Dow Theory Confirmation And Divergence by Richard L. Evans

According to one of the most important tenets of the Dow theory, the Dow Jones Industrial and Transportation Averages must confirm each other to be able to derive forecasting significance from them. In The Dow Theory, originally published in 1932, Dow theorist Robert Rhea states: "The movements of both the railroad and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading."

Intuitively, confirmation and divergence are acceptable as the bases of not only the Dow theory but of much of modern technical theory. However, there are questions to be answered regarding confirmation and other fundamentals of the Dow theory, as well as the critical question of interpretation.