Related-average confirmation lag after a correction

Two averages, one sequence

When two related averages advance together or decline together, that alignment is treated as confirmation and as information that can be acted on. A split in which one average rises while the other falls is not treated as a directional signal.

TradersWeek editorial reading treats the archive snapshot as a sequencing classroom rather than a finished market call. The work is to keep confirmation, nonconfirmation, and a shared positive MACD-histogram divergence in a fixed order so a split stays an open hypothesis.

Mark the primary trend first

A primary trend is the broad bull or bear movement lasting at least several months. Secondary corrections interrupt it and have been described as lasting from three weeks to several months while often retracing 33% to 66% of the prior primary swing.

A secondary correction stays classified as a correction, not a new primary trend, until price closes below the correction low in a bull market or above the reaction high in a bear market. The high of a bull-market correction, or the low of a bear-market reaction, is the correction extreme. A close beyond that level is what recasts the swing as finished.

A split is caution, not direction

A nonconfirmation between the two averages is a reason for caution because the split will later resolve into confirmation. The split itself does not show whether that later confirmation will resume the prior trend or reverse it.

The two averages do not need to move in lockstep to confirm. Confirmation can arrive days or weeks after one average has already reached a milestone.

The industrial and transport snapshot

After the July to August 2007 decline, both the industrials and the transports printed bullish positive divergences. The industrials then rallied to test highs near 14,000 while the transports bounce stayed muted.

On a closing basis the transports printed their first higher high only days before the snapshot, after the industrials had already done so in August. The transports remained below their 50-day exponential moving average after the industrials had closed above that average on September 13.

At the snapshot the transports had not broken the low of the prior significant correction from summer 2006, a decline of about 17%. Mid-August included a hammer that was read as leftover demand near the yearly lows rather than a new wave of selling.

Read the histogram as a fade

A large positive MACD-histogram divergence after a sharp decline is read as a sign that downside momentum has faded, even when the later bounce is much weaker in one average than in the other.

Positive MACD-histogram divergence means price making a lower low while the MACD histogram does not. That reading is fading downside momentum rather than a complete trend reversal.

Wait for the lagging close

TradersWeek editorial reading withholds a trend call while the lagging average has not closed back through its correction high. The transports remaining below their 50-day exponential moving average, after the industrials had already closed above that average, leaves that nearby barrier unmet.

A bounce that cannot hold a close above a correction high or a nearby moving-average barrier is a follow-through failure. It leaves confirmation unfinished.