Dow Theory And Confirming The Transport's February Down Move

02/24/04 07:51:42 AM

by David Penn

The Dow Averages continue to thrash about, neither able to confirm the moves of the other.

Security: $INDU, $TRAN
Position: N/A

Back at the beginning of February, ("Dow Theory Divergences," Traders.com Advantage, February 5, 2004) I asked the question: what happens if the Dow industrials fail to confirm the move down by the Dow transports? The move in question was the collapse in the Transports that began late in January and continued into February. This decline found the Dow transports taking out three-month's worth of previous lows before it bounced (shortly after taking out the November 2003 lows). At present, the Dow transports have rallied up into resistance at its 50-day exponential moving average and has started to move back down toward a test of the February lows established early in the month.

The Dow industrials, at the same time, have been exceptionally resilient. As of this writing (February 23, 2004), the Industrials have yet to take out their January lows, let alone any of the lows from the latter months of 2003. This resilience is significant. As I have pointed out elsewhere, the movement in one Dow average is almost irrelevant; it is the movement of both Averages considered together that is paramount to this tenet of Dow theory.

Figure 1: The Dow industrials may enjoy support from both the 50-day EMA, as well as the January/February consolidation range.

Graphic provided by: eSignal.

What does this mean for current market activity? As mentioned before, the Dow transports are falling toward a test of support at the February lows near 2815. Meanwhile the Dow industrials are shrinking back from their recent multi-month highs toward a test of the bottom of their consolidation range (the consolidation range that has buoyed the Industrials while the Transports were being rocked) near 10417.

Figure 2: A test of the February lows is all but assured in this daily chart of the Dow transports.

So once again, it appears as if the prudent thing to do might be to wait for the Industrials to confirm the lows of the Transports before making any solid determination that the markets have topped at any intermediate-term basis or longer. While presently it looks difficult for the Transports to avoid taking out its February lows, the Industrials may benefit from both support at the 50-day EMA, as well as the potential support provided by lower range of the January/February consolidation range.

There was another non-confirmation worth noting -- if only to point out how certain Dow theory events are noteworthy, but not truly significant. In my last Dow theory piece, ("Confirmations and the January Highs," Traders.com Advantage, February 12, 2004) I asked whether or not the Transports would confirm the Industrials move on February 11th above the January highs. As we know now, the Transports were not able to do so. Noteworthy, but again, this event was not especially significant. This non-confirmation (the Transports failing to confirm the bullish move of the Industrials) means that traders are best off considering the prevailing trend intact. And that prevailing trend, as it has been since March 2003, has been upward.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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DOW THEORY

Dow Theory And Confirming The Transport's February Down Move

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