The Dow Report: A Closer Look at the Ongoing Non-Confirmation
By Tim W Wood CPA, November 24, 2006
The advance out of the summer low remains intact. My intermediate-term Cycle Turn Indicator turned up back in July and thus far it remains positive today. Also, I maintain that the market is moving into the 4-year cycle top rather than out of the 4-year cycle low. The advance out of the summer low is now very mature and overbought. We also have ongoing non-confirmations and today I want to look at those non-confirmations as well as beneath the surface of these non-confirmations. Before we do that, I want to point out that just because an advance is mature, overbought or not confirming another index does not mean that the advance is over. No, I look to my indicators and a specific set of rules for that. This mature state simply tells us that conditions are ripe for a top. All the while, it seems that most people believe that the summer lows marked the 4-year cycle low. In reality, the statistics surrounding the 4-year cycle tell me that we are still moving into the 4-year cycle top rather than out of the 4-year cycle low. Thus, the mature, overbought and non-confirming averages should not be ignored. I realize this is contrary to popular opinion, but the data is what it is.
In the first chart below we have a chart of the Industrials and the Transports. Thus far, the Transports have not bettered their July high, which is noted in red. Also, the May high, noted in green, is yet to be bettered. The performance of the Transports have improved over the last couple of weeks and the old highs are now well within striking distance. Could they better this high? Sure, but until they do we still have a non-confirmation. Let me also add that if the Transports should better their May high, which would be a positive development, it would serve to further confirm the advance out of the summer low. But, it would not change the statistical implications surrounding the 4-year cycle.
In the next chart below I have plotted a chart of the Industrials in the upper window and a chart of the Dow Jones Select Top Ten Index in the lower window. This index is composed of the top ten dividend yielding stocks within the Industrials and is representative of what is known as the "Dogs of the Dow." Over the last month we have begun seeing a non-confirmation forming here as well. This non-confirmation is noted in red on the Industrials and in blue on the Top Ten. Again, non-confirmations are not buy and sell signals in and of themselves. I have a specific set of rules for that. But, it is noteworthy that such prior non-confirmations between these two indexes occurred at "seasonal" cycle tops. This is a long to intermediate-term cycle with an average duration of approximately 12 months. The previous seasonal cycle top that occurred in May was not accompanied by such divergence, but all other seasonal cycle tops shown on this chart were. The degree of the decline from the seasonal cycle top down into the seasonal cycle bottom is dependent upon a number of factors such as where we are in the longer-term 4-year cycle and more importantly something called cycle translation, which is outside of the scope of this article.
Next, I have included a chart of the Transports in the upper window and the Dow Jones Airfreight Index in the lower window. The point here is that when we look within the Transports specifically at the Airfreight sector we find that this sector is pretty much in sync with the over all Transports in that it has thus far not bettered its May or July highs. Therefore, there are not any divergences between the over all Transports and this sub-sector.
Below we have the overall Dow Jones Transportation Average verses the Marine Transporters. This chart comes with mixed blessings. Here, with the advance into October, the Marine Transportation Index was able to better its July high. As a result, the bar was raised and now the October high must be bettered by the Marine sector. Thus far it hasn't and this has created a shorter-term non-confirmation, noted in red, that must now be bettered.
In the next chart below we have the Dow Jones Transportation Average in the upper window verses the Dow Jones Railroad Index in the lower window. Here, both averages remain below their May highs, so they are in sync at this level. But, on a shorter-term basis we are now seeing a non-confirmation, which is noted in red. Like the Marine index the Railroads have not bettered their October highs. So, this is the second sub-sector that is not confirming the overall Transportation sector on a short-term basis.
Next, we have the Dow Jones Transportation Average in the upper window of the chart below verses the Dow Jones Trucking Index in the lower window. Here too, we have the Trucking Index that is not confirming the July highs as well as a non-confirmation between the October high and the November high. But, also note that with the decline out of the October high, the Trucking Index violated its prior lows.
So, the Trucking sector is by far the weakest sub-sector within the overall Transportation sector. The Rails and the Marine sectors also have issues with the most recent non-confirmations and are therefore the next weakest sub-sectors while the Airfreight sector is the strongest within the overall Transportation sector. If the weakness we are seeing by the Rails, the Marine and the Trucking sub-sectors continues, then it will soon begin to weigh on the overall Transportation average. When we add to this the non-confirmation that we are seeing within the Industrials by the Select Top Ten Index it is telling us that we are also seeing deterioration within the Industrials as well. The fact that these non-confirmations are all occurring at the same time has to be viewed as a warning that is potentially significant. One thing is for certain. If the 4-year cycle low was made at the summer lows, then we certainly should not be seeing divergences between and within these sectors this soon out of a bottom that significant.
If you are interested in a statistical and technical based source that also utilizes Dow theory and provides turn points for gold, the dollar, bonds and the stock market, using both statistical probability and my unique set of turn indicators, then Cycles News & Views may be for you. In the November issue I give all of the statistical probabilities for the 4-year cycle, based on the recent advance, as well as what should follow after the 4-year cycle low is made. Plus, I have now made a slide show presentation on the 4-year cycle available to subscribers. A subscription also includes short-term updates three nights a week. Please see www.cyclesman.com/testimonials.htm
Tim W. Wood
© 2006 Tim Wood