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THE DOW REPORT
Secondary Trend Reconfirmed

This week the bullish Secondary Trend, which was originally confirmed on January 6, 2006, was reconfirmed as both averages bettered their previous Secondary Reaction high points. This, of course, mended the much shorter-term non-confirmation that was trying to form last week. So, from a pure Dow theory perspective, the averages are now setup to challenge the all time high on the Industrials.

Below we have a chart of the Industrials and the S&P 500. Both held above the recent support levels that I discussed last week and both have moved to new recovery highs. Therefore, these averages are in gear with each other.

In the next chart below we have the Industrials verses the Nasdaq 100. Here, both indexes have held above the recent support levels as is noted in green. However, the fact that the Nasdaq is lagging is troublesome.

In fact, the last two intermediate term tops have occurred with just such non-confirmations between these two averages in place. These non-confirmations are marked in blue on the chart below and you can clearly see that we have the same such non-confirmation occurring now. Should the Nasdaq 100 fail to hold this support level, then it should mark the beginning of the end for this intermediate term cycle advance. Should the Nasdaq 100 better its January high, then this non-confirmation will be mended, all four of these averages would be in gear with each other and new recovery highs would be one giant step closer to reality.

Also, when we look beneath the surface of the market, the internals stink. As an example, I have plotted a chart of the Nasdaq 100 below. In the upper window I have plotted a measure of Advancing Nasdaq Issues in green and Declining Nasdaq Issues in red. Not only have the last two intermediate-term cycles peaked with fewer advancing issues than the previous peak, but we also now have a third lower peak in place on top of the price non-confirmation.

If we back up even further, we find that the entire advance since the 2002 rally began has occurred on diminishing advancing issues on the Nasdaq.

The last time such an unhealthy divergence with the underlying breadth data occurred was surrounding the 2000 top. I think we all remember what followed where this chart leaves off.

The bottom line is that, yes, the Secondary Trend remains positive and has in fact been reconfirmed. I am not arguing that point in the least. Furthermore, the Industrials, Transports and the S&P are all in gear, with the Industrials and the S&P positioned to challenge the old highs as this liquidity driven advance continues to grind on. But, at the same time the internals are rotten to the core. This advance is not healthy internally as is illustrated in part by the charts above. The Nasdaq 100 is once again failing to confirm the latest advance by the Industrials, which creates an important non-confirmation on top of these poor internals. This deteriorating internal picture is simply unhealthy and it will ultimately end badly. In the meantime, the Secondary Trend remains positive and the great liquidity levitation act hangs on a while longer.

If you would like more specifics on this Advance/Decline data, cycles, the statistical probabilities for 2006, Dow theory phasing, expected turn points, access to the Cycle Turn Indicator to pin point these turn points and much, much more, then please visit www.cyclesman.com for subscription information.

Tim W. Wood

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