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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

Using Dow Theory logic, a stock index makes a new high of 22,000 after a prior peak of 21,500, but the subsequent reaction low is 21,200 versus the earlier reaction low of 20,800. Which reading is consistent with the primary trend?

The primary uptrend continues. Dow Theory identifies an uptrend through successive higher peaks and higher troughs, and the index shows a peak of 22,000 above 21,500 and a trough of 21,200 above 20,800. Volume can confirm the trend but is not required to identify it.

  1. APrimary uptrend continues, as both highs and lows are higherCorrect
  2. BPrimary downtrend has begun, as lows are higher
  3. CTrend is sideways, as the index reversed from 22,000
  4. DNo inference is possible without volume data

Explanation

Dow Theory defines an uptrend by successive higher peaks and higher troughs. Here peaks rise from 21,500 to 22,000 and troughs rise from 20,800 to 21,200, so the uptrend is intact. Volume is only a confirming factor, not a precondition.

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