Through the writings of Dow and Hamilton, Rhea identified 4 separate theorems that addressed trend identification, buy and sell signals, volume, and trading ranges. The first two were deemed the most important and serve to identify the primary trend as bullish or bearish. The second two theorems, dealing with volume and trading ranges, were not considered instrumental in primary trend identification by Hamilton. Volume was looked upon as a confirming statistic and trading ranges were thought to identify periods of accumulation and distribution.

The first step in identifying the primary trend is to identify the individual trend of the Dow Jones Industrial Average (DJIA), and Dow Jones Transportation Average (DJTA), individually. Hamilton used peak and trough analysis in order to ascertain the identity of the trend. An uptrend is defined by prices that form a series of rising peaks and rising troughs (higher highs and higher lows). In contrast, a downtrend is defined by prices that form a series of declining peaks and declining troughs (lower highs and lower lows).

Once the trend has been identified, it is assumed valid until proved otherwise. A downtrend is considered valid until a higher low forms and the ensuing advance off of the higher low surpasses the previous reaction high. Conversely, an uptrend is considered in place until a lower low forms and the ensuing decline exceeds the previous low. Keep in mind that the Dow theory is not a science and Hamilton points this out numerous times. The Dow theory is meant to offer insights and guidelines from which to begin careful study of the market movements and price action.

Hamilton and Dow were interested in catching the big moves and would have been apt to use weekly charts to establish reaction highs and lows. Some feel that in today's fast moving markets, weekly charts may not portray the detail that investors need. I disagree and in fact recommend monthly charts to my clients.

There is no doubt that today's economy is much different and the makeup of the DJTA has changed to favor the airlines. However, there is still some credibility in using the DJTA to confirm movements in the DJIA. Transport stocks are much more dependent on the economic environment than the average stock and will likely foreshadow economic growth.

· The airline business is cyclical and revenues are highly susceptible to economic changes.

· Airline companies typically carry above average levels of debt and will be more vulnerable to changes in interest rates.

· Energy and Labor costs form a large portion of expenses.

To reflect the added risks above, airline stocks have traditionally sold significantly below market multiples. If the PE for the S&P 500 is 28, the average airline might sell for only 8-10 times earnings.

Even though we are possibly entering into a "new economy," the majority of businesses will somehow be affected by changes in economic activity, interest rates, energy costs and labor costs. Airline companies, bearing the burden of all of the above, are still likely to act as a leading indicator of the general economic environment.

However, one caveat must be added as well. Possibly the greatest fear of the airlines is that people will stop flying in airplanes. Business travel accounts for a large portion of airline revenues, especially the high margin revenues. With the development of the Internet and networking, the need for business travel could be greatly reduced in the future. Federal Express has already experienced a slowdown in the quantity of business documents being shipped. This could ultimately spill over into the business of the airlines.

Hamilton and Dow stressed that for a primary trend buy or sell signal to be valid, both the Industrial Average and the Rail Average must confirm each other. If one average records a new high or new low, then the other must soon follow for a Dow theory signal to be considered valid.