The Dow Report: Confirmers and Non-Confirmers
By Tim W Wood CPA, March 5, 2004
We have monitored the confirmations and non-confirmations between the Dow Jones Industrial Average and the Dow Jones Transportation Average for some time. But, what about other sectors that perhaps many do not watch or may not even be aware of? The concept of confirmation and non-confirmation is applicable not only from a Dow theory perspective, which is limited between the Industrials and the Transports, but is also applicable between other sectors. In a healthy market environment, we ideally should see the advance by the major market averages be confirmed by other market indexes. I have chosen several indexes that represent various economic sectors of the US economy. These sector indexes are comprised of stocks from like industries just like the well known Dow Jones Industrials and Transports.
A few weeks back I created a couple of portfolios that we periodically will be reviewing throughout the year. Similarly, I thought that I would pick a few sector indexes that we could also begin to monitor. By doing so, this will give us another tool that can be used to monitor the health of the current advance as well as the severity of any future declines. Understand that there are indeed more of these sector indexes than what I have included below. I just picked a few for the purpose of this exercise. I may add a few others as we move forward.
To begin with, we of course have the Dow Jones Industrial Average. As I illustrated before, trading cycle lows can be used for support levels to let you know when a trend is still intact or when it has potentially changed. I have marked each trading cycle low since the March '03 low with a "t." As you can see on the Industrials, each trading cycle low has held above the previous low. Therefore, the trend and cyclical structure of the Industrials have remained positive ever since March '03. This can be seen on the chart below.
Now let's look at the other indexes. To begin with, I have the Bank Index. You can see that it has confirmed the price action of the Industrials. More importantly, each trading cycle low has also held above the previous trading cycle low. This index is positive.
The next sector below is the Biotech Index. This sector index has also confirmed the market advance from March '03. The only hint of weakness came here when the November '03 trading cycle low marginally violated the September low. This violation was quickly corrected and thus far, this index is also positive.
The chart below is of the Computer Tech Index. This index also bottomed in March '03 and confirmed the other advancing indexes up until February '04. As you can see in early February, the January trading cycle low was violated. When this happened it meant that the trend of this market changed. So, for now, this sector index has ceased to confirm the other indexes. Until we see the formation of a higher trading cycle high and or low, this index is negative.
Consumer Staples have also been very positive. The decline into the early August '03 trading cycle low did see some weakness as the early July low was violated. However, this weakness was corrected when the index moved back above the previous trading cycle highs and since then, this sector has remained positive.
I could not resist including the Housing Index. As you can see below, this index has been very positive since the rally began in March '03. Every trading cycle low has exceeded the previous low. So, this too has been and remains a positive sector.
We now have a portfolio of sectors, so to speak, that we will be watching. If the market is to remain bullish, we ideally will want see these indexes continue confirming the price action of the Industrials. By the same token, any market weakness that is followed by a breakdown in these sectors should then be considered bearish. My point to all of this is that it will give us a broader look at the market and thereby provide us with a gauge with which we can monitor future market behavior for both positive and negative confirmations.
Tim W. Wood
© 2004 Tim Wood