Is March The Month For Higher Dow Highs?

03/02/04 08:03:41 AM

by David Penn

If both the Industrials and Transports take out their February highs, then the bull market will be confirmed once again.

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

It has been months since the Dow Averages were on the same page. But what a page it was! Back in early December, I noted how well the Averages were confirming each other since both put in monthly highs in August on the same day (see "Dow 3,000," Traders.com Advantage, December 4, 2003). This pattern of continuous, often same-day confirmation between the Industrials and the Transports, was a remarkable guide for stock market bulls looking to exploit the long side of the market rally that ended 2003.

However, it appears as if the challenge of taking out 3,000 in the Dow transports might have been too much for them, as the transports traded as high as 3090 in mid-January 2004 before quite literally collapsing. During this time (which I have already recounted frequently for Traders.com Advantage; most recently in "Dow Theory and Confirming the Transport's February Down Move," February 24, 2004) the industrials have remained quite resilient, spending February taking out the January high, while the transports were unable to confirm the move.

The exceptional weakness in the Transports has no doubt got many Dow theorists salivating -- particularly those Dow theorists who have demonstrated a profound affection for the bearish case of late. But in the world of the erstwhile Democratic presidential candidate, John Edwards: "Not so fast!" There may be more upside to this market than the weakness in the Tranports may appear to reveal.

Figure 1: A severe break in the Transports, but will a higher high follow February's higher low?

Graphic provided by: eSignal.

One of the things I have been trying to emphasize in this regular look at the application of the Dow theory tenet that "the averages must confirm" is that the action in a single Average is not indicative of any future action on the part of the other Average. Those looking at the collapse in the Transports and seeing a harbinger of the Industrials' future may be right, but Dow theory won't have anything to do with it. The confirmation principle in Dow theory suggests simply that there is no "meaningful" market movement in the Dow industrials or transports unless both Averages make the same movement.

Figure 2. After a two-month consolidation, could the oversold Industrials be ready to explode to the upside?

This can lead to some interesting situations, and just such an interesting situation may be right around the corner. First, both averages are in bull markets. The transports have taken out multi-month lows with their collapse in the second half of January. But because this move was not confirmed by the industrials, the market trend is considered upward. And note this as well: the industrials appear to be finding support both from the 50-day exponential moving average, as well as the lower range of its January/February consolidation. The stochastic (7,10) is oversold and hooking upward, and the MACD histogram appears to have bottomed and has begun rounding upward. Taken together, this is reasonable cause to believe that the industrials might in March take out their February highs.

What is fascinating is that the Transports -- beaten and battered as they were in January -- might take out their February highs, as well. The February highs just shy of 2961 are below the 50-day EMA, but as of March 1 the transports themselves were trading less than 60 points below that level. The stochastic is fairly neutral, with the MACD histogram appearing to have bottomed and ticked up. Even if the transports do not go on to take out their January highs in the near term, a closing high in March above the February highs could serve as confirmation if the industrials, as they appear poised to do, best their February highs.

Given this, it is easy to envision a scenario in which the transports barely confirm a higher March high vis-a-vis February with the industrials, yet themselves end up in a consolidation range near the 50-day EMA, while the industrials -- which have already consolidated -- move significantly higher.

David Penn

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

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DOW THEORY

Is March The Month For Higher Dow Highs?

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