The Dow theory is an investment theory which states that two interlinked indexes will confirm each other and that only when they do can a trend be established as fact.
This theory was established by Charles H. Dow and was originally based on the relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Average indexes.
According to this theory, if two or more indices tracking different sectors of the same economy confirm each other, an economic trend can be established. When both indices show growth in market activity or demand, an upward trend can be established. When both indices show a decline in market activity or demand, a downward trend can be established.
Although originally conceptualized as a tool for tracking U.S. economic activity, the Dow theory can be applied in any economy.
In a broader implementation, the Dow theory can also be used to establish a trend based on the relation between two or more similar indices, such as two major stock exchange indices.
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