Basically, if you use danced, the sentence would have to be They DANCED. So, they already danced. But, since the sentence is "they were", it would be "they were dancing".
A topic sentence can be stated or implied. A topic sentence that is stated is a part of a passage that can be found where the main idea or points can be identified. An implied topic sentence, on the other hand, is a sentence that is being made or composed by the reader which cannot be found in the passage.