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I recently presented an article which showcased the Russell 2000 Index trading at new all-time highs (here). Now the Dow Jones Transports Index is likewise flirting with new all-time highs, and might possibly negate the Dow Theory non-confirmation that has made headlines during the last year. The index is currently trading at the previous all-time high area, but a 5% pop through the old highs should solidly confirm a new high and negate the non-confirmation. That would give market bulls an extra boost of confidence.
For anyone unfamiliar with the Dow Theory non-confirmation, it works rather simply. The two indices to be considered are the Dow Jones Industrial Average Index and the Dow Jones Transportation Average Index. When both are trending higher and making new significant highs (e.g. all-time highs or cyclical rally highs), it is believed that the stock market's rally is confirmed – that is, when both the industrial and transportation sectors are making new significant highs, it is generally viewed that the economy is on sound footing and that the stock rally has solid underpinnings from two very important sectors. However, if only one of the two moves to new significant highs, it is considered a non-confirmation, since one sector is not participating fully in the rally; and that fact calls into question the validity of the stock market rally. In other words, believers in Dow Theory non-confirmation feel as though a warning is presented when only one of the two makes new highs because the stock market rally does not appear broad-based.
Previously, the Dow Industrial Average Index placed a new cyclical recovery high in September of last year, while the Dow Transportation Average Index did not. However, the current surge in the Transport Index now has it ready to establish new all-time highs, which would negate the non-confirmation should it continue to push on. If it does, that would certainly be a stock friendly technical development.
The chart below shows the Transport Index. The white horizontal line represents the index's all-time highs, while the red lines highlight a huge inverted head-and-shoulder-like pattern that is in place. The potential neckline would be the white line at the all-time highs. While I normally like to see this type of pattern placed as a true bottoming formation, I thought I would present it. You might wonder why it isn't a typical bottoming pattern. Yes, the inverted head was placed at a major and significant cyclical low. But the neckline is at the index's all-time high. These two facts provide for an enormous pattern, one that I would rather categorize as a possible huge continuation pattern.
If this pattern is prescient in regard to future price movement, then perhaps inflation is about to gain a foothold. Future growth prospects do indeed seem dim, yet perhaps the market rallies in nominal terms mostly because of an inflated currency. I have wrestled with this issue since the stock market bubble popped in 2007, and still remain perplexed. Will it be deflation or inflation, or as some suggest a combination of both? Only time will tell. But because of the unprecedented nature of the present time, be careful of closing your mind to either possibility. The economy's feet seem stuck in a tar pit. Meanwhile, the Transports Index might be joining the Russell 2000 in establishing new all-time highs.
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© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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