Eyeballing The September Lows

10/05/05 01:20:25 PM

by David Penn

Having bounced away from the August lows, the Dow Jones averages find themselves falling back toward the lows of September.

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

The last time I wrote about Dow theory for Traders.com Advantage, I was looking at the possibility of the Dow Jones averages providing a bearish confirmation by taking out the August lows ("The Confirmation Next Time," September 19). At the time, the Dow transports had already done so, and had the industrials followed suit, then a clear signal would have been sent that the markets were headed significantly downward.

The last confirmed Dow theory signal was actually a bullish one. It came back in late July as the averages simultaneously rallied and closed above their June highs. Nevertheless, as far as bullish opportunities go, this confirmation provided little in the way of upside fireworks. In both instances, it was almost as if the effort to surpass the June highs was so taxing, neither average could do more than roll over shortly afterward.

FIGURE 1: DOW TRANSPORTS. Having already taken out its August lows, the Dow transports now threaten to take out the September lows as well.

Graphic provided by: Prophet Financial, Inc.

Rather than leading to significantly new highs in the wake of the intermediate-term bullish confirmation, the industrials responded with largely sideways action. The transports performed better than the industrials at first, but slipped sooner, eventually falling below the July breakout level in late August and falling below the August lows in early September (Figure 1).

Where does that leave us now? For the bears, the September lows now loom as the level from which the next bearish confirmation--should there be one--will come. The industrials are tantalizingly close to those lows in early October, and it looks increasingly as if another "kick-save" at 10350 will be required to prevent that average from plunging through what has twice before proved to be reliable support (Figure 2).

FIGURE 2: DOW INDUSTRIALS. Strong support at 10350 looks as if it will be tested again in early October.

Graphic provided by: Prophet Financial, Inc.

There is also the possibility of a nonconfirmation in which one average took out the September lows and the other did not. This would be a victory for neither the bulls nor the bears, technically speaking. However, in the current context of a market that appears to have made an intermediate-term top in August, a nonconfirmation might have bullish implications if it served to reinforce the validity of the 10350 support level in the industrials or the 3575 level (approximately) in the transports.

As for the next bullish confirmation, a rally back above the September highs from the beginning of the month is the most likely scenario--although the selling in recent days makes the term "likely" seem like a bit of a stretch. Nevertheless, the technical damage that has been inflicted upon the averages in the short term is such that more than average effort on the part of the bulls will be required in order to mend it.

David Penn

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

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