Dow was the creator of an industrial average and a railroad average the second of which is the precursor to the modern-day transportation index. Dow believed that the two indexes represented the prospects for profits of their respective underlying earnings. The idea is that these two indexes are related in the manufacturing and distribution process. Basically, industry manufactures industrial goods which then require distribution by the rails. In that sense these two indexes should 'confirm' eachother.

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.