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1.8 - Index Confirmation

The "averages" usually refer to the index of something, usually the Dow Jones Industrial Average (DJIA) and the Down Jones Transportation Average (DJTA).

The Dow Jones Transport Average is thought to be the leading indicator

Dow theory states that for a trend to be valid and reliable, both averages must move in the same direction.

Divergence in the averages suggest weakness in the trend.

 

How to use this theory:

  • If an index is going up, you now have another point of confluence to enter a stock int he index.
  • Don't think of one index is "wrong" or one index will need to "catch up" to the other.
  • If one average is going up, but one is going down, it should be treated as weakness in the general market

 

(Consumer discresionary / consumer staples) is a good measure of risk on / off. Consume discersionary usually does well in good times, consumer staples usually do well in bad times

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