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. ' . -. ., .. .,- , – … ,' , ' Technical Market Action One of the major tenets of the Dow Theory is the principle of the confirmation of a trend by both the industrial ru1d rail average before a major move is indicated. A corollary, of course, is that a divergence in the two itvernges usually indicates a probable change in trend. In the past, this' particular phase of the Dow Theory has been subject to considerable criticism. The main objection was that the fueory of confirmation was outmoded bec(.use of the growing importance of the industrial average ad the lessening importru1ce of the rr.ils. At times these objections seemed partially justified at least. On several occasions, the industrial average moved nhead sharply and the rails either fniled to confirm by reaching new high territory,or else the confirmation oocurred after the major portion of the move had already been completed. However, in the past two years the theories of confirmation and divergence have worked out almost perfectly. In February of 1946 the industrial average reached a hi6h of 207.24 and the high on the rails was 6E1.42. This WIlS followed by the sharp February decline with the averages reachin'! lows of 184.05 and 59.86. Subsequently, both averages nlllied with the industrials in the lead and the rails 'lagging. This was contrary to previous performance. Since the inception of the bull market in early 1942, the rails had been the leaders in each advancing phase. The industrials penetrated their February hih in late Jepril but the rails failed to confirm. It was this divergence that prompted this letter to advise extreme caution and to predict in the letter of May 6th, 1946 that the potential distributional area built up in early 1946 indicated a possible decline to the 170-160 area in the industrial average. Ever since the September 1946 break I have conSistently stressed this same 170-160 area as a major buyine range. It has proven to be such for the past nineteen months. To continue with the action of the market in early 1946, the industrial average reached a high of 213.36 in Ide May, 6.12 pOints above the February hig!' of 207.24. The rails, however, could do no better than penetrate the February high of 68.42 by only a small fraction to reach 68.77. This divergence between the two averages proved t.o be an extremely important signal of a chanGe in trend. Subsequently, both averages penetrated the February 1017s of 184.05 ru1d 59.86 to confirm a downtrend. The averages declined to 160.49 and 44.00 in October. That provad to be low for the first phase of the decline. The next rallying phase carried to highs of 184.96 and 53.65 in February of 1947. It will be noted that the industrials reached the lOGical resistance point, the bottom of the 213-185 distribution area, but the rails failed to reach the equivalent 59, the bottom of the 68-59 distribution area. The next intermediate decline was the second instance of diverence. In May, 1947 the rail average declined to a neVi lovi at 40.43, 3.57 points belov; the October low of 44.00. The industrial average, hor-ever, failed to confirm a renewal of the downtrend bw holding above the previous October low of 160.49. The May,1947 10Vl was 161. 38 The third instance of divergence occurred at the July 1947 hiehs. The industrial average penetrated the February high of 184.96 to reach 187.66. The rail average failed to confirm, however, by attaininc a high of only 51.92 against the February hih of 53.65. h subsequent decline carried the avereges to lows of 174.02 for the industrials in September and 46.00 for the rails in December 1947. After that, the fourth instance of divergence occurred in early January of this year at 54.17. The industrial average failed to rcach the July, 1947 hith of 187.66 by 5.84 points at 181.82. . ….! ,r The opinions expreued in this I.tter are the personal interprotation of charts by Mr. Edmund W. Taben and re not pr,!sented as the opinions of Shield, & Company. Technical Market Action -2- The subsequent decline as the fifth instance of divergence. The in- dustrial ave rase broke the September, 1947 low of 174.02 and declined to e. loVi of 164.07 in February. The ril average held at a point aboe the December 1947 lovi and met support at 1.7.48. It ill be noted that, for the first time since the 1942-1946 bull market, the rail average showed better technical action than the industrials. The sixth occurrence of divergence is the present technical P1Cttel'n. The rail average has decisively penetrated all previous resistance points of the last ninetee months to reach a hieh of 59.63 on lesday, 5.46 points above the previous January high of 54.17, or e. penetration of apprOximately 10. On the other hand, the industrials at the April 23rd high of 184.48 t.nd WendesdDY's closin of 180.94, have failed to confirm the excellent tcchnical. r-.ction of the rail average. That brings us up to de,te. Will the industrial averat;e shortly confirm the penetre.tion of the nineteen month tradinci range und prove the theory con- Sistently advocated by this letter that the market 1s in a hi1,;h accumulation areo.' .Vli th considerably higher prices indica ted over the lon;er term y opinion has definitely not changed. I believe that the industrial avera;;e will, over the comparatively !lear term, confirm the bullish pttern of the reil averaGe. The only question is whether the confirmation will take place in the very near future or at a slie;htly Ie.ter dcte. In other words, will \;e get a one-third to one-half correction of the 20.41 point advance of the indus- t!'ial avera;e from the 'February low of 164.07 to the April hir.h of 184.48 immediately Such a correction would carry the industrial average to 173-175. The second a1 ternative would be a penetration of the July hieh of 187.66 and a rally to the 200-195 area before a technical correction occurs. t. one-third to one-half correction from that point would carry the industrial cverage bLck to the 188-180 area. Ability to penetrate the previous high of 184.48 Vlould indi- cate the probability of 200-195. Penetration of last week's 10Vi of 179.47 on the indus trials would favor the possibility of 178-175 before the advance is resumed/ May 5, 1948 EDMUND H. TABELL SHIELDS & COMPANY Closings Dow-Jones Industrials Dow-Jones Rails Dow-Jones 65-Sto'ck 180.94 57.97 66.91 n.. opinions expreued in this letter ere tIM, personal Tnterpretetion of cherts by Mr. fd….nd W. Tabel! end … no! n'ed .. ' opinion. of Shield. a. CompanY.