Interactive Visual Concept Diagram
Dow Theory Principles & Market Structure Breaks (MSB)
Understanding higher highs, lower lows, and structural trend shifts.
### Foundations of Market Structure
Formulated by Charles Dow, Dow Theory remains the foundational framework for structural technical analysis.
Market Structure Classifications: 1. **Uptrend**: Characterized by a sequence of **Higher Highs (HH)** and **Higher Lows (HL)**. 2. **Downtrend**: Characterized by a sequence of **Lower Highs (LH)** and **Lower Lows (LL)**. 3. **Market Structure Break (MSB)**: Occurs when price breaks below the previous higher low in an uptrend, or above the previous lower high in a downtrend, signaling structural trend change.
- •Trade in the direction of the dominant higher timeframe market structure.
- •An uptrend remains intact until the most recent Higher Low is broken.
- •MSB combined with volume surge is the earliest signal of major market reversals.
Trendlines, Channels, and Dynamic Support/Resistance
Drawing geometric trendlines to identify dynamic trend channels and bounds.
### Drawing Valid Trendlines
A valid trendline requires at least **three touch points** on a price chart.
Channel Trading: - Parallel channels connect swing highs and swing lows. - **Channel Top**: Represents dynamic resistance / profit-taking zone. - **Channel Bottom**: Represents dynamic support / buy zone.
- •Steep trendlines (> 60 degrees) are fragile and subject to sharp mean-reversions.
- •Stepping out of a channel often leads to rapid accelerated breakout moves.
Identifying Market Regimes: Trending vs. Choppy Volatility
Filtering strategies according to current market regime conditions.
### The 4 Market Regimes
- **Bull Trend (High Momentum)**: Buy pullbacks using EMAs.
- **Bear Trend (Aggressive Selling)**: Short rallies at resistance.
- **High Volatility Range (Expansion)**: Trade boundary rejections; widen stop-losses.
- **Low Volatility Squeeze (Compression)**: Prepare for imminent breakout expansion.
- •Never use trend-following strategies in a low-volatility sideways range.
- •Identify regime before picking strategy; regime selection is 70% of edge.
NIFTY / BANK NIFTY Intraday Trend Alignment
Aligning multi-index correlation and opening range breakouts (ORB).
### Multi-Index Correlation in Indian Markets
NIFTY 50 and BANK NIFTY represent over 60% of total derivatives turnover on the National Stock Exchange of India.
Key Alignment Factors: - **Index Divergence**: If NIFTY makes new high while BANK NIFTY fails to confirm, exercise caution (divergence signal). - **Opening Range Breakout (ORB)**: Monitor the high/low of the first 15-minute candle for directional momentum.
- •Always check HDFC Bank, ICICI Bank, Reliance, and Infosys weighting before trading index options.
- •Never trade against both NIFTY & BANK NIFTY moving in unison.
Recommended Reading & Academic Literature
Trading in the Zone
By Mark Douglas
Mastering market structure and mindset.