Dow Theory applied to NEPSE

Dow watched two averages — industrials and rails — and would not call a trend confirmed until both agreed. Nepal has one exchange, so the rule has to be adapted rather than recited.

What plays the part of the second average

Because banking and finance dominate NEPSE by market capitalisation, an index move that the banking sub-index does not confirm is being carried by a small number of shares. That is exactly the unconfirmed condition Dow warned about.

Worked: an unconfirmed high

• The index made a new high. The largest sector by weight did not — it fell.
• The move was carried by hydropower, a smaller and far more volatile part of the market.
• In Dow's terms the high is unconfirmed. It may still continue. It is simply resting on narrower support than the headline number suggests.

Volume, and what it can confirm here

Dow's second rule is that volume must confirm the trend: rising on moves with the primary trend, falling on moves against it. On NEPSE that is checkable, but with two caveats worth knowing.

• Turnover is concentrated. A handful of shares can account for a large share of a day's total, so index-level volume can rise without broad participation. Check the number of shares traded, not only the rupee turnover.
• Circuit limits truncate volume. A share locked at its limit stops trading, so a genuinely violent day can print less volume than a calm one. Low volume at a limit is not disagreement — it is the absence of a permitted price.

How much weight Dow Theory can carry→