Dow Theory

Argument that a stockmarket trend is not significant until both Dow Jones Industrial Average (DJIA) and Dow Jones Transportation indexes (indices) reach new highs or lows in lockstep. If they don’t, it states, the market will revert to its former trading level. The theory argues that since the first index reflects the productive capacity and the second the volume of goods distributed, as long as they rise or fall together the economic trend will be maintained. Similarly, if the indexes move in opposite directions, a reversal in the trend is to be expected. This theory, however, does not attempt to forecast the duration of any trend.

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