Sideways Market Signals

“Lines” May Substitute for Secondaries — A Line in Dow Theory
parlance is a sideways movement (as it appears on the charts) in one
or both of the Averages, which lasts for 2 or 3 weeks or, sometimes,
for as many months, in the course of which prices fluctuate within a
range of approximately 5% or less (of their mean figure). The formation
of a Line signifies that pressure of buying and selling is more or
less in balance. Eventually, of course, either the offerings within that
price range are exhausted and those who want to buy stocks have to
raise their bids to induce owners to sell, or else those who are eager
to sell at the “Line” price range find that buyers have vanished and
that, in consequence, they must cut their prices in order to dispose of
their shares. Hence, an advance in prices through the upper limits of an established Line is a Bullish Signal and, conversely, a break down
through its lower limits is a Bearish Signal. Generally speaking, the
longer the Line (in duration) and the narrower or more compact its
price range, the greater the significance of its ultimate breakout.
Lines occur often enough to make their recognition essential to
followers of Dow’s principles. They may develop at important Tops
or Bottoms, signaling periods of distribution or of accumulation, respectively,
but they come more frequently as interludes of rest or
Consolidation in the progress of established Major Trends. Under
those circumstances, they take the place of normal Secondary Waves.
A Line may develop in one Average while the other is going through
a typical Secondary Reaction. It is worth noting that a price movement
out of a Line, either up or down, is usually followed by a more
extensive additional move in the same direction than can be counted
on to follow the “signal” produced when a new wave pushes beyond
the limits set by a preceding Primary Wave. The direction in which
prices will break out of a Line cannot be determined in advance of
the actual movement. The 5% limit ordinarily assigned to a Line is
arbitrarily based on experience; there have been a few slightly wider
sideways movements which, by virtue of their compactness and welldefined
boundaries, could be construed as true Lines. (Further on in
this book, we shall see that the Dow Line is, in many respects, similar
to the more strictly defined patterns known as Rectangles which appear
on the charts of individual stocks.)