|Since making the new reaction highs in June, a non-confirmation could be brewing. A non-confirmation occurs when one average moves to a new reaction high (or low), but the other average fails to forge a corresponding reaction high (or low). To remain strong, the Dow Industrials and Dow Transports should continue to confirm corresponding highs. The Dow Transports moved to a new reaction high at the end of July (red arrow), but the Dow has yet to exceed its June high. Although not a sell signal, this non-confirmation shows that the Dow Industrials are not as strong as the Dow Transports and serves as a warning.|
|Figure 1: Dow Industrials.|
|Graphic provided by: MetaStock.|
Figure 2: Dow Transports.
For a Dow Theory sell signal, this non-confirmation would have to be followed by new reaction lows in both averages. Using the June lows, the Dow Industrials would have to close below 8985 and the Dow Transports below 2356 (green support lines). Support breaks would argue for at least a correction of the prior advance and Charles Dow liked to use 50%. For the Dow Transports, a 50% retracement of the prior advance would correct back to around 2285. For the Dow Industrials, a 50% retracement would correct back to around 8450.
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