Looking Back on Downtrends and Uptrends on the Dow Jones

Nov 10, 2007: 7:48 PM CST

Could we be on the verge of a new downtrend on the US Indexes? Let’s look at the past for some clues.

Uptrends are defined as a series of higher highs and higher lows.

Downtrends are defined as a series of lower lows and lower highs.

To change an uptrend, price must first make a new low beneath the recent swing low, swing up and form a lower high, but that is not enough. Price must swing down and TAKE OUT the most recently established lower low and THEN we can confirm that price has begun a new downtrend.

The obvious flaw in this approach is that price will give up a percentage of ground before we can begin official defensive tactics – we will never trade at the absolute high or low in price. That’s a perfectly acceptable approach for greater confirmation of a move underway.

Of course, conflicting trends can occur on different timeframes. A trend change will occur first on the daily chart before it changes officially on the weekly chart.

As we stand right now, the daily charts of the DIA (Dow Jones ETF/Dow Jones Index) are in confirmed downtrends and the weekly chart is pennies away from being confirmed as a downtrend.

Let’s look at the current picture and historical confirmed uptrends and downtrends.

The ‘official definition strategy’ recently experienced dual whipsaws in terms of official classification. We were in a lengthy confirmed daily uptrend and then the August imbalance thrust us into a confirmed downtrend.

Price making higher lows, higher highs, and then taking out those higher highs confirmed us to be in a fresh downtrend (the weekly chart did not confirm a downtrend then).

As of last week, price completed the ‘official definitional switch’ by making a swing low, creating a failure swing (lower high) and then taking out the lower low to confirm the downtrend.

Officially, we are in a confirmed downtrend on the daily chart.

Here is a lengthier, ‘prettier’ chart that details daily price uptrends (green) and downtrends) red:

As you can see in the chart below, if the DIA breaks $130 decisively (Dow Jones level 13,000), then both the weekly AND daily index charts will be in confirmed downtrends.

Stay alert and cautious… and be prepared to change investment postures to more defensive tactics if need be.

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