According to Dow theory both the Primary and the Secondary trend remain positive. The Secondary Trend was confirmed as being positive in February and then again in March. This positive confirmation carried the market as expected up into a joint high in May. At that high the Transports had moved into a new all time high but the Industrials had not. As I read the averages, this meant that the Secondary trend was still positive, but the Primary trend wasn't. In any event, the averages then sold off into their June lows. That low marked a "Secondary Reaction" low point. From that low the Industrials have moved up into new high territory and in doing so my read is that this turned the Primary trend bullish again. But, the problem now comes with the price action of the Transports. From the June low the Transports moved up briefly into their July 3rd high but did not make a new high. Then, from that failed high the Transports violated their previous Secondary low point with the move down into August. In all fairness, there is also an argument that can be made for the August low having marked the previous Secondary Reaction low on the Transports rather than the June low. In any event, from the August low the averages advanced again, but the Transports still have not bettered the previous failed high that was made in very early July.

So, at present we have the Industrials at an all time new high, which has the world plum giddy. All the while we have a failed advance on the Transports at a Secondary level followed by what could be a violation of the previous Secondary low point followed by what is thus far a second failed rally of Secondary level.

This leaves us with what I call a three-way non-confirmation. The first non-confirmation is marked in blue on the chart below and occurred when the Transports violated their June low. The second tier to this non-confirmation came when the Transports failed to better their early July high, which marked the previous Secondary high point and is illustrated in red on the chart below. The third tier of this non-confirmation now comes with the Transports failing, at least so far anyway, to better their previous Secondary high point, which is illustrated in green.

Below are a few quotes from the great Dow theorists of the past on this subject:

Robert Rhea - "The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages."

Robert Rhea - "A wise man lets the market alone when the averages disagree."

Robert Rhea - "When the averages disagree they are shouting 'be careful.'"

William Peter Hamilton - "In the study of the price movement, based upon Dow's theory, so successfully applied in The Wall Street Journal for the last twenty years or more, it has been repeatedly found that the two averages must confirm each other to give an authoritative prediction."

William Peter Hamilton - "Independent movements on previous experience are usually deceptive, but when both averages advance or decline together, the indication of a uniform market movement is good."

William Peter Hamilton - "A new low or a new high made by the one (average) but not confirmed by the other, is almost invariably deceptive. The reason is not far to seek. One group of securities acts upon the other; and if the market for Railroad stocks is sold out, it cannot lift the whole list with it if there is s superabundant supply of the Industrials."

William Peter Hamilton - "It seems a clear inference in a movement where the averages do not confirm each other that uncertainty still continues as concerns the business outlook."

William Peter Hamilton - "The movement of both the railroad and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading."

William Peter Hamilton - "Dow's theory stipulates for a confirmation of one average by the other. This constantly occurs at the inception of a primary movement, but is anything but consistently present when the market turns for a secondary swing."

William Peter Hamilton - "When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive."

William Peter Hamilton - "Indeed it may be said that a new high or a new low by one of the averages unconfirmed by the other has been invariably deceptive. New high or low points for both have preceded every major movement since the averages were established."

William Peter Hamilton - "The two averages may vary in strength, but they will not vary materially in direction especially in a major movement. Throughout all the years in which both averages have been kept, this rule has proved entirely dependable. It is not only true in the major swings of the market, but it is approximately true of the secondary actions and rallies. It would not be true of the daily fluctuations, and it might be utterly misleading so far as individual stocks are concerned."

I guess that my point here is twofold. One is that in spite of these Secondary non-confirmations my read is that both the Primary and the Secondary trend remain positive at this time and I am not here to fight that trend or to dispute that fact. The market could still yet advance further in spite of these non-confirmations. However, my second point is that this ongoing Secondary non-confirmation is clearly a warning and you can see what the great Dow theorists of the past had to say about this subject.

Let me also stress that these non-confirmations are not sell signals as many people who have not sufficiently studied the Dow theory may believe. No, they are warnings. At present it would take a move by both averages back above their previous Secondary high points in order to nullify these warnings. So, as long as the Transports continue to lag, these warnings hold and this is the environment where what Robert Rhea termed as "sell spots" could develop. In the meantime, caution is warranted as I believe this ongoing non-confirmation is far more important than most people realize. All of the focus is on the Industrials and the fact that they are now making new highs. In the process, I believe that this advance is doing its job at sucking every last possible participant into believing that all is well. Sure, the trend remains up, do doubt about that and only a fool would argue differently. But, according to Dow theory, all is not quite well.

For more details on the current technical conditions using Dow theory, trend quantification, statistical expectations and more, visit www.cyclesman.com. I cover the stock market, gold, the dollar and bonds. The newsletter also includes short-term update 3 nights a week. In the October newsletter I give the timing for the coming 4-year cycle low, which has not changed since I first introduced those statistical expectations back in February. I also cover the details surrounding the current advance and the resulting statistical probabilities surrounding the timing of the decline into the 4-year cycle low, the extent of the expected decline and even what should follow with the next 4-year cycle advance.