Extra From Street.com: Dow Theory
While considerable work has been done on Dow Theory, it can be divided into a handful of core tenants. First off, the market is broken down into three different movements of either direction: primary trends, which last for years and are inviolate; secondary or intermediate trends, which last for weeks or months; and minor trends, which last for days or less, and are irrelevant for Dow Theorists.
Those trends are significant because they dictate which direction investors should be betting on the market. Along the way, those trends should be confirmed by volume, and each has its own lifecycle of accumulation, public participation, and distribution. These trends manifest themselves in the averages, or the broad market. As an investor, the ideal trade is to buy into a primary trend and hold as the market bears out its direction. Keys to doing that include ensuring that the averages confirm each other (that is, a bottom in the Dow Jones Industrials coincides with a bottom in the Transportation Average), and realizing that the averages discount all external factors that could effect the market.