Admittedly, our post on the Dow Theory and exchange traded funds (ETFs) was a bit unclear. A few commenters specifically questioned the "new high" determination.
"New high" in this case does not mean the same thing as "all-time high." It instead is used to determine when the market is on an uptrend and conversely, when it’s on a downtrend.
Backtracking a bit, Dow Theory is based on a few assumptions, outlined in an article from Stock Charts:
- The markets cannot be manipulated. While there are wild days of sharp drops and big highs, everything eventually reverts back to the primary, long-term trend.
- The market reflects all information. Look at the averages. This is why we use the 200-day moving average as an indicator. While there are short-term wild swings in either direction, a long-term average is a much more reliable bellwether for the performance of a stock or ETF.
- It ain’t perfect, but it does provide some guidelines.
The market has three movements: