Intimate Confirmations

07/21/05 02:07:27 PM

by David Penn

Same-day confirmations in the Dow industrials and transports mean markets that are headed higher.

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

Bastille Day, on July 14, is celebrated throughout France as the day in 1789 when the aggrieved citizens of Paris stormed the infamous jail tower known as "la Bastille," freed the prison's seven(!) detainees, and ignited the French revolution.

Jump to more recent history, and bulls were celebrating a different kind of breakout on Bastille Day 2005, especially those bulls that think decades-old Dow theory still has a thing or two to tell traders and investors about the movement of markets. For it was on July 14, 2005, that both the Dow industrials and transports closed above their respective June high closes, broadcasting to all who cared pay attention that the next few-to-several hundred points in the markets were likely to be higher, rather than lower.

Moving sideways in the days after closing above the high close for June, the Dow industrials show more follow-through to the upside shortly thereafter.

Graphic provided by: Prophet Financial, Inc.

In late June, I highlighted a nonconfirmation between the industrials and transports ("Nonconfirmation Comes to the Averages," Traders.com Advantage, June 24, 2005). The non-confirmation involved the failure of the Dow transports to close -- or even move -- above its April highs during the May-June rally as the Dow industrials did.

While this was certainly a more bearish intimation than a bullish one, I cautioned at the time -- as I have when discussing all Dow theory nonconfirmations -- that nonconfirmations are, in a significant sense, Dow theory non-events. By that, I mean only that, as Dow theorists like Edwards and Magee have reminded us, nonconfirmations do not provide positive, or affirmative, signals. Whatever value they provide as technical signals intimating strength or weakness, the information provided by non-confirmations is nearly unintelligible when compared to that provided by confirmations.

A brief pullback after closing above the June high close serves as the pause that refreshes Dow transport bulls.

Graphic provided by: Prophet Financial, Inc.

And a confirmation is exactly what took place on the afternoon of July 14th, as both the Dow industrials and transports closed above their June high closes. An overzealous trader acting on the relative bearishness of the non-confirmation in June would have found him or herself covering come July.

What's next? The eye-popping move in the Dow transports (I guess I now know what "brown" can do for me!) is likely to be retraced by some measure and, along with the industrials, some sort of test of the breakout level is also to be expected -- if not merely prepared for. I've written about confirmations that their slogan might often be better articulated as "Traders, Get Ready," as opposed to "Traders, Get Going." That may be no less true with this confirmation in late July. But for now, the markets seem plenty ready, which gives traders and investors more than enough to go on.

David Penn

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

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DOW THEORY

Intimate Confirmations

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