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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 whichfit into each other. The first is the variation due to local causes and the balance of buying andselling 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 greatswing covering from four to six years.

Note his first four words.

The trends Dow identified are these days most commonly called the Short, Medium, andLong-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 theidentification 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 onlyascertain a trend, but also observe its individual characteristics. We can clearly see itsdirection, strength and velocity. We can spot when it fades and when it reverses.And dont 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 isbelow zero negative/down.The red histogram plots the Medium-term trend. Likewise, above zero MT trend is positive/up,below its negative/down.The back line plots the Short-term trend. Again, above zero ST trend is positive/up, below itsnegative/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 theabove chart.

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The chart, as it developed, ensured the continual erosion of my bull market optimism over thepreceeding months.

The blue LT trend , although positive, exhibited Sustained and Increasing bearishdivergence from its peak in mid October.

The closer it decended towards the +100 level (a trigger level for me) the more of a nervousnellie 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 myperceptions re the LT trend. The last two MT peaks were of similar height no bearishdivergence indicated there.

The black ST trend , as you would expect in a positive market, occaisionally dipped intonegative territory. The last two peaks did exhibit a touch of bearish divergence, but nothingtoo alarming.

The Analysis

To me, this chart, as it developed, indicated an increasingly higher degree of Probability thatthe 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 signalsemanating 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 focustoward shorts - strategies that I hoped would ensure my safety and continuing profitability.And isnt the safety of our capital, in enabling continuing profitability, the single most importantelement in trading?

After all that blather Im not sure if Ive answered the original question. You check the chartand 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, weve got an indicator that will give us a health check on the current, and prior,condition of the market. And weve 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 itsuse in trading, check out the second Word document. DOW WAVES 2.doc.

Regds everyone, and good trading.Gerard