Dow Theory suggests that the direction of trend in the overall market place is established by analyzing the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (TRAN) in unison. In order for a market to be considered in a Primary Bull or Bear Trend, both indices must confirm it.
Per Dow Theory, the market is entering a Primary Bull Trend (uptrend) if both averages (Industrial and Transportation) rise above a previous important high, then make an equally important higher low. If only one average does this, there is no confirmation of a new Primary Bull Trend. Assuming the market is already in a Primary Bull Trend, this trend cannot be reversed unless both averages confirm a reversal.
Dow Theory also says that when both averages drop below previous important lows after a lower high, it viewed as an indicator of the start of a Primary Bear Trend (downtrend).
Dow Theory may seem basic, but it's used by many Technicians and if quite effective when done right. You may miss 5% or more of the reversal move (if analyzing for a reversal), but you are much less likely to lose if you are patient and wait for confirmation from both averages.
Related terms: Uptrend, Downtrend, Trend Channel, Primary Trend, Secondary Trend, Minor (short term) Trend.