CS Executive · Corporate Accounting and Financial Management · Security Analysis
Which statement about the Dow Theory principle of confirmation is correct?
Dow Theory holds that a trend is valid only when the two averages, industrial and transportation, confirm each other by moving in the same direction. One index alone, falling volume or a single company's fundamentals cannot confirm the trend.
- AA trend signal is reliable only when two indices, such as the industrial and transportation averages, confirm each otherCorrect
- BA trend is confirmed when trading volume falls sharply during the move
- CA trend is confirmed by a single index rising for three consecutive days
- DA trend is confirmed only when the fundamental analysis of one company agrees with it
Explanation
Dow's confirmation principle requires the Industrial and Transportation averages to signal the same direction before a trend is accepted. Volume is supposed to expand in the direction of the trend, not fall, so the falling-volume option is wrong.
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