The general idea behind the theory is that both averages, over time, should move in tandem given that the Transportation Average is responsible for the movement of goods across the country. For that reason, it should serve as a leading indicator.Self-taught market wizard Richard Dennis took a $1600 loan and turned it into an estimated $200 million. He shares the 13 trading rules that turned his performance parabolic.
Put differently, both are dependent on each other. If the economy is thriving, transportation companies should also be thriving as they are tasked with literally moving the economy. Technical analysts look to Dow Theory to confirm broad movements in the stock market. Specifically, traders are looking for potential confirmations and divergences between the two indexes.
A confirmation is when both the Transports and industrial averages break out to new highs , which signals that the trend in the broader market is up . A divergence is when one of the two averages isn't moving in tandem with the other. On Wednesday, the Dow Jones Transportation Average closed at a new all time high. The index has been driven by a surge in parcel delivery companies
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