Dow Theory

There's the overall average of the DOW 30 stocks over here…and the Dow Jones Transport index over here. Where one goes, generally the other follows.

That is...they are highly correlated in price.

Why? Well, originally the Dow transports were railroads which hauled all the crap that the dow industrials made. So you’d think that one would follow the other. Take a look at a caterpillar crawling.

One half goes forward. And the other follows.

Dow Theory is one of a gajillion black box crystal ball theories that chartists tried to use to predict how the stock market would run in the future, so that they could profit from those predictions.

Like all the other black box theories, they work...sometimes even very nicely for a while with high prediction levels…until they don't.