The Dow Report: A Look at Confirmations and Non-Confirmations
By Tim W Wood CPA, October 7, 2005
This was a bad week for the bulls, but from a Dow theory perspective, this decline remains unconfirmed. As long as this short-term non-confirmation remains, there is hope for the bulls. Specifically, the recent decline seen by the Industrials has carried them below their mid-September short term low. Yet, the Transports have held above their corresponding low. Could it be that this non-confirmation is telling us that price is forming or about to form another low, or are the Industrials simply leading the charge?
In the next chart below we have the Dow Jones Industrial Average in the upper window and the Dow Jones Financial Index in the lower window. If we apply the concept of confirmation and non-confirmation, these averages have confirmed each other to the downside. This, in turn, implies lower prices.
In the next chart below we have the Industrials vs. the Retail Holders Index. But, here we also have a non-confirmation of the recent decline. This also brings up the question as to whether or not a low is forming, or if the Industrials are just leading the way down.
In the next chart below we have the Industrials vs. the Russell 2000. These indexes have confirmed each other suggesting not only weakness in the Blue Chips, but rather broader based weakness that is spilling over into Small Caps.
The chart below is of the Industrials and the Nasdaq 100. Both of these indexes have broken below recent support levels, and this in turn puts the Industrials in gear with the Nasdaq.
So what we have here is the Industrials in gear with the financials, the small caps and the tech sector. This tends to point toward a uniform broad-based decline. However, we have the Retail Holders, which often lead the market, not confirming this decline. Furthermore, we have the Transports that are currently out of gear with the Industrials. Therefore, from the perspective of confirmations, the bag remains mixed and uncertain for both the bull and the bear in the short term.
But, as I have been saying for months now, from a longer term Dow theory perspective, the advance out of the 2002 low is merely a secondary reaction within the context of the ongoing bear market. The sideways action seen for the last 22 months has been and continues to be the distribution top of the rally, which will ultimately separate Phase I from Phase II of this bear market. All the while, we have record bullishness among the masses. Last week Investors Intelligence recorded the longest running period of consecutive weeks of more bulls than bears.
The previous record occurred with a count of 152 consecutive weeks of more bulls than bears and that reading occurred in conjunction with the 2000 bull market top. At this top, the Dow theory had been warning for some 4 months leading into the top. Then the market sold off into March 2001 and people became even more bullish as can be seen in the chart below. When the indicator in the upper window is above 1, then it is reflecting a reading of more bulls than bears. Below 1 shows more bears than bulls. The market actually spent 125 weeks in a topping process that took place surrounding the 2000 bull market top. During this time there were price breaks both above and below the boundaries of this range. All the while the Dow theory warned of trouble as did the cycles work and most technical indicators. The technicals were indeed telling us that this was a time to be bearish. But, few listened.
Here we sit in the 96th week of an ongoing trading range surrounding the current top. The Dow theory has continued to warn as have the cycles work and other technical work. The market is exactly where it was December 2003. But, the masses remain bullish and in fact, last week Investors Intelligence recorded the 153rd consecutive week of more bulls than bears. Yes, the short term is unconfirmed for either the bulls or the bears. Because of this trading range, few are listening, which is exactly the way it was at the bull market top. You have been warned, again!
Tim W. Wood
The October issue of Cycles News & Views is now available. In this issue I give specific timing windows for price, price targets, trend expectations, and more. This issue covers the stock market, gold, the dollar and bonds. This is beefy 25 page issue. Given the current state of the markets, you should have the technical data provided in this issues. For more information please visit www.cyclesman.com.
Tim W. Wood
© 2005 Tim Wood