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THE DOW REPORT
A Look at Confirmations and Non-Confirmations

On January 6, 2006 the Secondary trend, according to Dow theory, turned bullish. This was originally reported to you here in the January 13, 2006 Market Wrap Up that followed. As of today, the Secondary Trend remains positive and it would take a break by both averages below their previous Secondary low points in order to officially turn the Secondary Trend back down. The blue line on the chart below shows that both averages have bettered their previous Secondary high points. The red line shows a very short-term non-confirmation beginning to form, which will require a little more time in order to tell if it is going to evolve into a more meaningful event. A move back above the most recent highs would serve to reconfirm the Secondary trend, while failure to do so will set the stage for more weakness to take root. In any event, as long as both averages hold above their previous Secondary lows, the averages will remain bullish at the Secondary level.

Below is a daily chart of the Industrials verses the Retailers. It has been a while since we looked at the Retailers, so a follow-up here is due. Obviously the Retailers are not a part of Dow’s theory. But, I like to look at the Retailers and apply the concept of confirmation and non-confirmation. This can give us a heads up when the averages hit potential turn points. As you can see in the chart below, when the Retailers and the Industrials are not “in gear,” it typically results in corrective action. In the most recent move the Retailers have failed to confirm the Industrials. Given that the Industrials have recently made new recovery highs, it would have been much more positive if the Retailers had also confirmed the move. The fact that the Retailers continue to lag is a warning that we must keep in mind.

In the chart below we have the Industrials verses the S&P 500. Note that here too we have a short-term non-confirmation, which also serves as a bit of a warning. Ideally, we should see major indexes confirming each other as a move unfolds. Thus far, this short-term non-confirmation has not resulted in any real technical damage. The first level of technical damage would come with a joint violation of the support levels as noted in green on the chart below. As long as these two averages hold above these support levels, this short-term non-confirmation is easily fixable, while violation of these two support levels could evolve into something bigger.

In the next chart below we have the Industrials verses the Dow Jones Top Ten Index. Here, we find a non-confirmation that has been going on now for over a year. Here too, we should ideally see this index, especially since it is a subset of the Industrials, confirming the movement of the Industrials themselves. With a third of the larger index lagging, this failure can only be viewed as an unhealthy sign.

Next, I have included a chart of the Industrials verses the Nasdaq 100. Here too, we have a shorter-term non-confirmation brewing, but like the other indexes, no real technical damage has resulted. Both the Industrials and the Nasdaq 100 are holding above recent support levels and until those levels are violated, this short-term non-confirmation is only a warning.

The bottom line here is that yes, the Secondary Trend according to Dow theory remains bullish, while the Primary Trend remains bearish, and the Dow theory phasing continues to suggest that there is more downside on a larger scale yet to come. The fact that we are seeing these non-confirmations serves as little red flags that we simply have to be aware of and monitor as they could evolve into a much more meaningful decline; or if they hold above support they could be mended, resulting in yet more upside. These little red flags simply mean that this is, in fact. an opportunity for at least a correction, but perhaps a trend change.

For more details on the current technical conditions using Dow theory, trend quantification, statistical expectations and more, visit www.cyclesman.com. I cover the stock market, gold, the dollar and bonds. The newsletter also includes short-term update 3 nights a week.

Tim W. Wood

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