Dow Theory has been around for close to 100 years and has stood the test of time. One of the tenets of Dow Theory is that the averages must confirm. Originally this referenced the Dow Jones Rail Average and the Dow Jones Industrial Average (DJI). However, the theory now uses the Dow Jones Transportation Average (DJT) instead of the Rail index.
The DJI represents the manufacture and sale of goods. DJT represents the movement of goods to market. Therefore, a greater confidence can be had when an upturn or downturn in the DJI is confirmed by a similar move in the DJT.
If both indexes are trending in the same direction, it suggests that the entire market is also trending in that direction. Investors can leverage these signals to spot the primary market trend and make trades in line with it.
Recently the Dow Jones Industrial Average and the Dow Jones Transportation Average have both charted 52-week highs. According to Dow Theory this is a promising outlook for a wider bull market. This strategy has a strong historical track record in identifying primary trends in stocks.
The exponential moving average (EMA) is regarded as a trend-following indicator. The DJI's green 5-month EMA bullishly crossed above its orange 10-month EMA back in January of this year (black ellipse). The DJT's EMAs have only just crossed (red ellipse) and confirmed the DJI's signal. If the monthly EMAs develop angle and separation to the upside, this will be regarded as a bullish development and a continuation of a primary bull trend.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.