The Dow Report: Non-Confirmations Continue

By Tim W Wood CPA, December 30, 2005

Over the last several weeks we have been watching a few of the non-confirmations that have developed. Non-confirmations can be corrected, in which case the two averages will get "in gear" together and the previous trend is then reconfirmed. But, when these non-confirmations continue, the averages are shouting "be careful."

For the benefit of newer readers and as a review, we have two non-confirmations between the Industrials and the Transports shown on the longer-term chart below. One is a Primary non-confirmation and the other is a Secondary non-confirmation. The Primary non-confirmation is shown in green and the Secondary is shown in blue.

Given that the Primary trend, according to Dow theory, remains bearish and in light of this longer term non-confirmation combined with the fact that this non-confirmation is occurring at what should prove to be the top of the rally separating Phase I from Phase II of a larger bear market, this non-confirmation is a very very important factor overhanging the market.

At this moment, the Secondary trend remains bullish and has been since July. But, according to Dow theory it is because we now also have the non-confirmation at the Secondary level, as noted in the chart above in blue, that this bullish Secondary reaction is now becoming questionable. In addition to the Secondary non-confirmation marked in blue, there is now a third level non-confirmation, which is also occurring at the Secondary level and is marked in red on the chart below. This non-confirmation came to be when the Transports bettered their November highs while the Industrials lagged.

So, the bottom line is that, according to Dow theory, we now have three levels of non-confirmations all occurring at the same time and this is definitely a warning for those who understand or respect the Dow theory.

The next non-confirmation that we have been watching has nothing to do with Dow theory. However, I have found this to be an interesting and noteworthy relationship to monitor. Below we have a chart of the Industrials in the upper window and the Retail Holders in the lower window. The non-confirmations that have occurred at market tops since 2004 are marked in blue. The most recent non-confirmation that we have been watching occurred when the Industrials moved above their summer highs, but the Retailers lagged in spite of the fact that we have just finished the Christmas shopping season. In fact, we are now seeing the Retailers begin to break down. Note that the Retailers have now violated their early December lows. This break is marked in red. The fact that the Industrials have not also violated their corresponding December low, this "break" is not yet actually confirmed, but will be if the Industrials follow suit.

Another important chart is that of the Auto Manufacturers. It has been a few months since we looked at this last and now is a good time to follow up on that chart. I have marked the intermediate-term cycle lows that have occurred since the early 2003 low with an "I." Note that this index topped in January 2004. With the failure of the intermediate-term cycle advance out of the March 2004 low failing to move above the previous cycle highs, this failure confirmed the longer-term trend change. Since that failure each of the intermediate-term lows has violated the previous intermediate-term cycle low as is noted by the blue support lines. Based on the phasing of this intermediate-term cycle, this index should continue lower into early 2006 as the next intermediate-term low is formed.

So, just as the non-confirmation with the Retailers and the Industrials are telling us that the consumer has pulled back, so is the cyclical structure of the Auto Manufacturers Index. The weakness by the consumer should ultimately be reflected in the Industrials as the current non-confirmations are telegraphing. As a result of any further weakness by the Industrials we should also expect to see further weakness in broader market averages as well.

In conjunction with these non-confirmations and cycle phasings, I use my intermediate-term Cycle Turn Indictor for timing. This indicator is covered in Cycles News & Views as well as the web based updates. In the current issue of Cycles News & Views I also give updated statistical projections based on the advance out of the October intermediate term lows. For more information, please visit www.cyclesman.com

Tim W. Wood

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Tim W. Wood CPA
Cycles Man
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