The Dow Report: The New Non-Confirmation and a Closer Look at the Transports

By Tim W Wood CPA, January 27, 2006

According to Dow theory, the good news was that the Secondary Trend had turned positive with the early January rally, which carried the Industrials up above both the March and the November highs. The bad news then came on Friday the 20th. The price action on that one day dealt a hard blow to the early January positive developments. As a result of that decline, we now have another shorter-term Secondary non-confirmation in place. This non-confirmation is illustrated in green on the chart below and occurred as a result of the Transports moving above their December highs, with the Industrials lagging. Not only are the Industrials lagging, but they have also moved below their December lows. As I read it, the December lows currently must be considered the last Secondary low point and as I warned last week, violation of that low is not good news. Now, the challenge for the Industrials is to better the recent January high. If this occurs it will heal the current non-confirmation and we would then label the January low as the last Secondary low point rather than the December low, and that of course would be great news for the market. Until such time, we must remember that Robert Rhea used to say, "When the averages disagree, they are shouting be careful." So, until this new Secondary non-confirmation is healed, the caution flag is out.

Last week I reported on several of the Transportation sectors and this week I want to follow up because of new developments. I have plotted the Dow Jones Transportation Average in the upper window of the chart below and the Dow Jones Rail Average in the lower window. This week, the Rails have exploded and are now in perfect sync with the Transports as both averages pushed above their December highs this week. Thus far, this is very good price action.

Next, I have plotted the Dow Jones Transportation Average in the upper window of the chart below and the Dow Jones Trucking Average in the lower window. Here, both averages are holding above their previous short-term Secondary low points as is marked in red. But, the Truckers are lagging and have created a short-term non-confirmation and unless corrected, this could begin to pressure the overall Transportation average.

In the chart below I have plotted the Dow Jones Transportation Average in the upper window and the Dow Jones Air Freight Average in the lower window. Here, the Air Freight average is found to be slightly weaker than the other transportation sectors in that it has marginally violated its December lows. Here too, the Air Freight Average has not confirmed the recent highs made by the Transportation Average and the result is another non-confirmation between these averages.

Lastly, we have the Dow Jones Transportation Average in the upper window of the chart below and the Dow Jones Marine Transportation Average in the lower window. As you can see the Marine average is the weakest link among the Transporters as it has clearly violated its early December lows, which is marked in red on the chart below. Also, the Marine Transporters have retested the bottom side of that level and have thus far turned back down from what is so far an unsuccessful retest.

With the Dow Jones Transportation Average moving to new recovery highs and the Industrials lagging, yes of course, we have another Dow theory non-confirmation of Secondary degree forming. But, the real point to this exercise was to follow up on a closer look within the overall Transportation sector to see if there are any cracks appearing. The answer is yes, there are with the Marine Transporters being the weakest, followed by the iffy Air Freighters and then the Truckers, with the Rails being very, very strong. If the Transports were to top out here, then it would likely leave this Secondary non-confirmation intact, which could in turn be marking a turning point for the averages. So, I want to keep an eye on all of this. If the weak sectors continue to weaken and if the Rails begin to slow down, then this will perhaps give us some insight, ahead of time, as to the seriousness of the current Dow theory Secondary non-confirmation that is now in the making.

The February issue of Cycles News & Views will be available later this weekend. In this issue I give very specific market expectations that are suggesting a 91.5% known outcome as to both price and time for the cyclical movements into the spring. I also look at what is to follow into the summer, later into the end of 2006 and an extensive look at the 4-year cycle, where we are and what to expect with it as well. These expectations are based on over 100 years of market history and trend quantifications. A subscription to Cycles News & Views also comes with access to the subscriber-only web page, the Cycle Turn Indicator as is used for identifying short and intermediate-term market turns and intra-week postings that are done three times a week. For more information, please visit www.cyclesman.com.

Tim W. Wood

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Tim W. Wood CPA
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