In today’s lesson we are going to take a look at the second 3 tenets which will finish up our discussion of Dow Theory and give us a strong basis which we can then use to analyze trends and eventually place some trades.Tenet four of Dow Theory is that The Averages Must Confirm Each Other.
The averages must confirm each other. Here Dow was referring to the Dow Jones Transportation Index and the Dow Jones Industrial Average. To understand this point it is important to remember that in Dow’s time the growth in the US was coming mainly from the Industrial sector. These two indexes were made up of manufacturing companies and the rail companies which were the primary method used to ship the manufacturers goods to market. What Dow was basically saying here is that you could not have a true rally in one of the averages without a confirmation from the other because if manufacturer’s profits were rising they would have to ship more goods.
This meant that the profits of the transportation companies and therefore the transportation average should rise too. Dow stated that when these two averages moved in opposite directions it was a sign that the market was going to change direction.
Tenet five is Trends Are Confirmed by Volume.
The averages must confirm each other. Here Dow was referring to the Dow Jones Transportation Index and the Dow Jones Industrial Average. To understand this point it is important to remember that in Dow’s time the growth in the US was coming mainly from the Industrial sector. These two indexes were made up of manufacturing companies and the rail companies which were the primary method used to ship the manufacturers goods to market. What Dow was basically saying here is that you could not have a true rally in one of the averages without a confirmation from the other because if manufacturer’s profits were rising they would have to ship more goods.
This meant that the profits of the transportation companies and therefore the transportation average should rise too. Dow stated that when these two averages moved in opposite directions it was a sign that the market was going to change direction.
Tenet five is Trends Are Confirmed by Volume.
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