The Father of Technical Analysis, Charles Dow, in his famous ‘Wall Street Journal” editorial of

January 4, 1902, stated:

“nothing is more certain than the fact that the market has three well-defined movements which
fit into each other. The first is the variation due to local causes and the balance of buying and
selling at that particular time. The secondary movement covers a period ranging from ten to
sixty days, averaging probably between 30 and 40 days. The third movement is the great
swing covering from four to six years.”

Note his first four words.

The trends Dow identified are these days most commonly called the Short, Medium, and
Long-term trends. And while analysts and we TA techies dither about the precise length of
each trend, most would agree with the basic premise.

My efforts to ascertain the current market condition using TA, have been directed towards the
identification of these three trends, to note their respective levels, and then to observe their
relationship with one another.

The advantage of using a Momentum indicator to do identify trends, is that we can not only
ascertain a trend, but also observe its individual characteristics. We can clearly see its
direction, strength and velocity. We can spot when it fades and when it reverses.
And don’t we just love its ability to signal divergence.

The above chart shows my attempt at identifying the three trends in the DJI.

Interpretation.
The blue line plots the Long-term trend. If it is above zero the LT trend is positive/up, if it is
below zero negative/down.
The red histogram plots the Medium-term trend. Likewise, above zero MT trend is positive/up,
below it’s negative/down.
The back line plots the Short-term trend. Again, above zero ST trend is positive/up, below it’s
negative/down.

Now to the question recently posted #107418 :

did “Any AB users catch the recent fall on the DOW with their scripts?” - the one on the
above chart.
The chart, as it developed, ensured the continual erosion of my bull market optimism over the
preceeding months.

The blue LT trend, although positive, exhibited “Sustained and Increasing” bearish
divergence from its peak in mid October.
The closer it decended towards the +100 level (a trigger level for me) the more of a nervous
nellie I became. The longer a particular measurement stays above or below a defined level,
the more importance we techies assign to its breaking that level.

The red MT trend, chugged along the entire time in a very positive fashion, challenging my
perceptions re the LT trend. The last two MT peaks were of similar height – no bearish
divergence indicated there.

The black ST trend, as you would expect in a positive market, occaisionally dipped into
negative territory. The last two peaks did exhibit a touch of bearish divergence, but nothing
too alarming.

The Analysis
To me, this chart, as it developed, indicated an increasingly higher degree of Probability that
the market was due for a correction, was overbought, call it what you will. The importance of
that sustained divergence of the LT trend completely overwhelmed the strength signals
emanating from the two lesser trends.

What to do?
As the degree of probability rose from a whisper to a yell, it told me progressively, to further
tighten my long stops, to decrease the position size of any new longs, and to switch my focus
toward shorts - strategies that I hoped would ensure my safety and continuing profitability.
And isn’t the safety of our capital, in enabling continuing profitability, the single most important
element in trading?

After all that blather I’m not sure if I’ve answered the original question. You check the chart
and make your own mind up.
What I do know is that I had no open long positions when the fall came.
I was neither overly surprised, nor unprepared.

So what have we got?

Hopefully, we’ve got an indicator that will give us a health check on the current, and prior,
condition of the market. And we’ve got all the good info on one pane.

If you are interested in the formula, and the description of how I arrived at it, and ideas on its
use in trading, check out the second Word document. DOW WAVES 2.doc.

Regds everyone, and good trading.

Gerard