Two-average confirmation as a swing-by-swing classroom drill

A drill, not a leadership story

Editorial framing: read two-average confirmation as a classroom drill. Mark each industrial-average extreme. Wait for a matching transportation-average extreme on the same chart scale. A missing match weakens the trend hypothesis. It is not a story about which sector leads the cycle.

The industrial-average is the broad price series of large industrial and related companies used as one of the two series that must confirm. The transportation-average is the carrier series used as the second series in that test.

What counts as confirmation

Confirmation in the confirming-averages sense requires that highs and lows in the industrial-average be matched in relatively short order by highs and lows in the transportation-average, and the reverse. Those paired turns are matched-extremes. They are treated as mutually reinforcing.

If one average prints a significant high and then a higher high while the other prints a significant high but fails to make a higher high, the unmatched high is treated as suspect and a reversal is watched for. That split is nonconfirmation. The new high that is not followed is an unconfirmed-high.

Confirmation language usually asks whether transports confirm industrial highs and lows. The two averages are better described as tandem-movement than as a standing lead-lag pair.

Membership of both averages has changed substantially over time, yet the confirmation relationship between them is described as remaining consistent.

Unmatched extremes in 2000 and 2001

In March 2000 the industrials printed two roughly equal lows while transports printed a low and then a higher low, so the second industrial low was not confirmed.

In July and August 2000 the industrials made a higher high while the transports' July and August highs were essentially equal, so the industrial high was not confirmed.

In the first quarter of 2001, transports put in successively lower highs into early March while industrial highs stayed roughly comparable, and that pairing was read as raising the chance of an industrial breakdown.

By mid-November 2001 both averages were still making new short-term highs, so confirmation itself added no duration information about that advance. Editorial reading: matched-extremes can endorse the swing in force without saying how long that swing will last.

Confirmation-lag and a known miss

The method is not treated as fail-safe. A noted limitation is the lack of a buy signal after the 1987 crash.

Critics argue that waiting for confirmation lags price. That wait is confirmation-lag. Critics call it lateness. The method treats it as time for the swing to become more meaningful.