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TECHNICAL ANALYSIS


Transports Test October Lows

02/27/03 08:15:28 AM
by David Penn

With all attention on the sagging blue chips, the Dow Transports are staging an important test of the October lows.

Security:   DJT, DJI
Position:   N/A

There is no guarantee that the Dow Transports' current test of their October lows will have any significance for the Dow Industrials. But the notion that "the averages must confirm" is one of the core tenets of Dow theory, and if the Transports fail and move below the October lows, then those who ascribe to Dow theory will have gained significant evidence that the Dow Industrials might do just the same thing.

The resilience of the blue chips, represented by the Dow Industrials, is such that many have considered the October lows from 2002 to be the untouchable "bottom" of the current bear market. Even some of those who have suggested that the bear market in stocks might continue for several more years--albeit in a range-bound fashion--have nevertheless tended to suggest that the October lows would likely remain as low as the market will go. While this is certainly possible, all eyes should be on the Dow Transports. If the Transports fail the test of their October lows, then the next question will be whether or not the Industrials "confirm" this move down with a failed test of its own October lows.

The Dow Transports begin an important test of the October lows in February.
Graphic provided by: MetaStock.
 
It is worth noting that the Dow Transports anticipated the current downturn in the Dow Industrials. Back in December (see my "Dow Reversal?", Traders.com Advantage, December 5, 2002), I suggested that the inability of the Dow Transports to confirm the higher high made by the Dow Industrials late in November hinted toward weakness for both averages going forward. Interestingly enough, both the Industrials and the Transports experienced rallies in January. But neither of these rallies established significant higher highs relative to those in early November in the Transports and late November for the Industrials. Shortly thereafter, the January rallies collapsed and both averages experienced significant downtrends that remain in place.

The importance of the Dow Transports' test of the October lows does not lie exclusively with the bears. Should the Transports rally from a successful test of these lows, then it is likely that the Dow Industrials will manage to stay above its October lows. While that scenario does not rule out the sort of continued declines that would bring about the Industrials' test of the October lows, any ability on the part of the Transports to avoid making a lower low vis-a-vis the Industrials would certainly be a bullish sign for the Industrials.

Of course, if the Transports make a lower low--in effect, failing the test--then there is still the possibility that the Industrials will not make experience any test of its October lows. This, too, would set up a bullish situation--one based on a positive non-confirmation (i.e., one average making a lower low while the other does not would be considered bullish). However, a lower low in the Transports would strongly suggest that the Industrials, at a minimum, would end up testing the October lows. In and of itself this would involve a significant decline, given that the Dow closed at 7909 on February 25th and the October lows are still almost 650 points away.



David Penn

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

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