According to Dow theory, once confirmed, the trend is considered to be in force until it is authoritatively reversed by a joint movement above or below the previous secondary high or low points. In bull markets a joint move by the averages below the previous secondary low points is required to reverse the bullish trend and in bear markets a joint move above the previous secondary high points is required. It is not a requirement of Dow theory that these movements occur on the same day. But, when one average fails to confirm the movement of another average, above or below a previous secondary high or low point, a Dow theory non-confirmation is born.

Non-confirmations typically do occur at major trend reversals, but at the same time a non-confirmation can exist for a period of time, only to be corrected at a later date as the averages eventually confirm one another. Thus, these non-confirmations do not always mean that a trend change is inevitable, but they do serve as warnings. The key with Dow theory comes from having enough experience and understanding of Dow theory, which comes largely from studying the works of our Dow theory founding fathers as a basis, to understand what constitutes a secondary high or low point.

Anyway, as the averages pushed into the secular bull market top in 2007, a Dow theory non-confirmation began to take root. Both averages pushed into joint highs in July 2007. It was then from that high that the averages both declined into their August 2007 secondary low points and at that point they were in gear with each other. From the August 2007 secondary low points, a new secondary movement began and it was from that low that the Industrials moved to its all time closing high on October 9, 2007 at 14,164.53. However, the Transports, failed to confirm this move and from that non-confirmation both averages moved down into their next secondary low point, which occurred in January 2008 for the Transports and in March 2008 for the Industrials. It was the decline below the August secondary low points that occurred in November 2007, on the way down that served to authoritatively reverse the previous primary bullish trend by giving us a Dow theory bearish trend confirmation.

Note on the chart below that the decline into the January/March 2008 secondary low point created a downside non-confirmation. It was then from these secondary low points that the movement into the next secondary high began. This time, the Transports moved to a new all time high on June 5, 2008 at 5,492.95. However, because the Industrials failed to confirm, with a joint movement above their previous secondary high point, the previously established bearish primary trend remained intact and another upside non-confirmation was formed.

Moving forward to today, we have a situation in which the Transports have moved to another all time high, while the Industrials have not. This can be seen in the chart above. It seems that many are erroneously referring to this as a long-term Dow theory non-confirmation, which allegedly has some dire consequences. This is not true. The fact that the Transports have moved above their previous all time high, which occurred in 2008, while the Industrials have not moved above their 2007 all time high, is of no consequence in accordance with Dow theory. This does not constitute a legitimate Dow theory non-confirmation. With Dow theory, it is the joint movement above or below previous secondary high and low points that is important and not a previous high or low point from some 3 years prior. As the averaged topped in 2007 and 2008, this was the case. Also, this is occurring after the decline into the 2009 Phase I low.

From a current Dow theory perspective it is the joint close above the recent secondary high point that served to reconfirm the existing bullish primary trend change, which has been in effect since July 2009 as the averages began moving up out of the Phase I low. Now, that said, it is important to also understand that this bullish primary advance is occurring within the context of what still appears to be a longer-term secular bear market. In accordance with Dow theory, bull and bear markets unfold in three phases with important counter-trend movements separating these three phases. According to the longer-term phasing aspects of Dow theory, the rally that began at the 2009 low should prove to be the rally separating Phase I from Phase II of this longer-term secular bear market. Thus, my longer-term bearish view has not changed. But, the point to this article is to clarify that the fact the Transports have moved to an all time high while the Industrials have not does not constitute a legitimate Dow theory non-confirmation and to draw the conclusion that it has some longer-term meaning in accordance with orthodox Dow theory is wrong. The longer-term warning in accordance with Dow theory comes from the Phasing aspects and not this alleged "non-confirmation."

In order to give the longer-term perspective on this phasing, I have also included a chart of the 1966 to 1974 secular bear market below. It was the decline out of the 1966 top into the 1966 low that marked the Phase I decline during this period. The 26 month rally that followed into the 1968 top was the rally separating Phase I from Phase II and the decline from late 1968 into1970 marked the Phase II decline. The rally from mid-1970 into January 1973 was the rally separating Phase II from Phase III and the decline from January 1973 into the 1974 low was the final Phase III decline. I think that our current situation is synonymous with the 1966 to 1968 period. Again, it is the phasing aspect of Dow theory that has longer-term negative consequences for the market. I have identified very specific traits, which I refer to as DNA Markers, that have occurred at every major top since the inception of the averages in 1896 and these details are covered in my research letters. Once the DNA Markers properly present themselves, the Phase II top will be at hand. I warned of these DNA Markers as the markets moved into the 2007 top. Some listened and some did not. I hope you are listening this time.

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