Dow Theory

The Dow theory is a financial theory that says the market is in an upward trend if one of its averages (i.e. industrials or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time.

KEY TAKEAWAYS

• The Dow Theory is a technical framework that predicts the market is in an upward trend if one of its averages advances above a previous important high, accompanied or followed by a similar advance in the other average.
• The theory is predicated on the notion that the market discounts everything in a way consistent with the efficient markets hypothesis.
• In such a paradigm, different market indices must confirm each other in terms of price action and volume patterns until trends reverse.