The idea of confirmation is at the heart of the application of Dow Theory. Confirmation in Dow Theory occurs when both indexes reach a new secondary high or secondary low on a daily closing basis. The confirmation does not have to come on the same day and in reality may be several days or weeks apart. The primary factor to consider is that a trend cannot be deemed to have reversed unless both averages confirm a change in direction by setting new lows in the case of a primary bull market which is reversed or new highs in the case of a primary bear market. This is probably best demonstrated by examples which are included below.

With the evolution of the Dow Jones Industrial Average over the years to include quite a broad array of companies, many of which are not traditional goods manufacturers, and also the less representative nature of rails in the Transportation Index to include air, sea, and trucking companies there are other versions of Dow Theory floating around out there. One such popular methhod is to look at the S&P500 as representative of large-cap multinational companies many of which derive a good portion of revenue in non-dollar denominated markets and pair that with the small-cap index, the Russell 2000, which is primarily dollar-denominated domestic companies. We'll look at both below.