Peak and Trough Progression

In the quest for sophisticated mathematical techniques, some of the simplest and most basic techniques technical analysis has been underused is peak-and­trough progression. The idea of the interruption of a series of peaks and troughs is the basic building block for both Dow theory and price pattern analysis.

Technical analysis is the art of identifying a (price) trend reversal based on the weight of the evidence. As in a court of law, a trend is presumed innocent until proven guilty. The evidence is the objective element in technical analysis. It consists of a series of scientifically derived indicators or techniques that work well most of the time in the trend identification process.

The art consists of combining these indicators into an overall picture and recognizing when that picture resembles a market peak or trough. Widespread use of computers has led to the development of some very sophisticated trend identification techniques in market analysis. Some of these indicators work reasonably well, but most do not.

The continual search for the "Holy Grail," or perfect indicator, will undoubtedly continue, but it is unlikely that such a technique will ever be discovered. Even if it were, news of its discovery would soon be disseminated and the indicator would gradually be discounted.

In the quest for sophisticated mathematical techniques, some of the simplest and most basic techniques of technical analysis are often overlooked. One simple but basic technique that has been underused is peak-and­trough progression, which relates to Charles Dow's original observation that a rising market moves in a series of waves, each rally and reaction being higher than its predecessor.

When the series of rising peaks and troughs is interrupted, a trend reversal is signaled. To explain this approach, Dow used an analogy with the ripple effect of waves on a seashore. He pointed out that just as it was possible for someone on the beach to identify the turning of the tide by a reversal of receding wave action at low tide, so the same objective could be achieved in the market by observing the price action.