Wednesday, June 22, 2016

Dow Theory Update for June 22: A closer look to the current US stock market situation





How the classical and Schannep's Dow Theory complement each other





I am writing before the close.

US STOCKS

The primary trend (as determined by Schannep’s Dow Theory) is bullish, as explained here and here.

The secondary trend is bearish (secondary reaction), as explained here.

As I alerted here, US stocks have set up for a primary bear market signal. The Industrials, the Transports and the SPY have rallied by more than three percent. Thus, unambiguously the set up for a primary bear market is beyond questioning. However, at the same time, it seems more likely that such strong rallies (while setting up the market for a primary bear market signal) are harbingers of a break up above the last recorded primary bull market highs of April 20th. We will not jump the gun, and wait for market action. Until now only the SPY (and S&P 500) has broken up its previous primary bull market highs. Thus, anything may happen.

I’d like to further explain the current situation. The chart below will give you some guidance.

As I explained here, both Schannep’s and the “Rhea/classical” Dow Theory (which only uses two indices) are undergoing a secondary (bearish) reaction against the primary bull market. Furthermore, both Dow Theory flavors have setup for a primary bear market signal.


Hence, we have two alternative and equally valid possible scenarios.


Scenario 1. Classical/Rhea Dow Theory


Just look at the Industrials (top) and Transports (middle) indices on the chart below. As you can see the last recorded closing highs were made on April 20th. From that date a secondary reaction developed (orange rectangle). The lows of the secondary reaction were made on  May 19th (Industrials) and May 13th (Transports). Thereafter, both indices rallied more than 3% (albeit, only one index suffices) and setup stocks for a primary bear market signal. Look at the red horizontal lines. They show the relevant levels to be jointly violated for a primary bear market to be signaled.

Conversely, if the blue horizontal lines (last recorded primary bull market closing highs) were jointly broken up, the primary bull market would be reconfirmed, and, thus, we would set our “clock” to zero in order to appraise the next secondary reaction.


Scenario 2. Schannep’s Dow Theory

According to Schannep’s Dow Theory a secondary reaction started on April 20th (as with the classical Dow Theory). However, Schannep’s Dow Theory requires for a signal to be flashed that the SP 500 must be present (more about this, here)


In other words, for a primary bear market to be signaled, the SP 500 (SPY) should violate its May 19th secondary reaction closing lows (red horizontal line at the bottom of the chart). Additionally, either the Industrials or/and the Transports should also confirm and violate their respective secondary reaction closing lows.

Conversely, if the SP 500 (SPY) together with the Industrials and Transports (here Schannep demands triple confirmation) breaks above the primary bull market closing highs (blue horizontal lines) a primary bull market would be signaled. 

The blue and red horizontal lines are the relevant price levels the watch

Bottom line:

a)     If the SPY and/or the Industrials/Transports violate the red horizontal lines (secondary reaction closing lows), a primary bear market will be signaled (Schannep’s Dow Theory)

b)     If the Transports and the Industrials (with no SPY confirmation) violate the red horizontal lines (secondary reaction closing lows), a primary bear market will be signaled, as well (classical Dow Theory).

c)     If the SPY and the Industrials and the Transports break above the blue horizontal lines (primary bull market closing highs), the primary bull market will be reconfirmed (Schannep’s Dow Theory).

d)     If the Transports and the Industrials (with no SPY confirmation) break above the blue horizontal lines (primary bull market closing highs), the primary bull market will be reconfirmed (classical Dow Theory).

GOLD AND SILVER

The primary trend is bullish, as reported here and here.

The secondary trend is bearish (secondary reaction against the primary bull market), as explained here.

On June 9th, SLV and GLD set up for a primary bear market signal, as explained here. Subsequent market action has not changed the current picture.


 GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here

The most recent decline experienced by SIL and GDX did not qualify as a secondary reaction. Recent confirmed higher highs have set the clock for a secondary reaction to zero (more about it here).


Sincerely,
The Dow Theorist

Monday, June 20, 2016

Dow Theory Update for June 20: Trends remain unchanged





Narrow ranges prevail


I am writing before the close of June 20th.

There is lot of noise in all markets. Basically, all longer term trends fail to reassert themselves and markets are caught in trading ranges. This is the typical environment when trading with moving averages (or breakout systems) may prove to be devastating, as many whipsaws are likely to occur. No wonder most trend following systems (and hedge funds) are undergoing a rough patch. However, the good thing of the Dow Theory is that, while not completely immune to whipsaws, it is not so easy to change the status of the primary trend, and hence many false signals are avoided. In my post “DowTheory versus Moving Averagesyou will find a study proving the net superiority of the Dow Theory versus moving averages when it comes to avoiding whipsaws.

Thus, while on the surface it seems difficult to discern the long term trend, we give the benefit of doubt to the current long term trend (i.e. bullish for stocks, gold and silver and their miners). Until reversed by a Dow Theory signal, the ongoing trend (last Dow Theory signal) is to be respected.

US STOCKS

The primary trend (as determined by Schannep’s Dow Theory) is bullish, as explained here and here.

The secondary trend is bearish (secondary reaction), as explained here.

As I alerted here, US stocks have set up for a primary bear market signal. The Industrials, the Transports and the SPY have rallied by more than three percent. Thus, unambiguously the set up for a primary bear market is beyond questioning. However, at the same time, it seems more likely that such strong rallies (while setting up the market for a primary bear market signal) are harbingers of a break up above the last recorded primary bull market highs of April 20th. We will not jump the gun, and wait for market action. Until now only the SPY (and S&P 500) has broken up its previous primary bull market highs. Thus, anything may happen.


Please mind that a setup for a primary bear market does not imply that a primary bear market is certainly coming. The secondary reaction closing low may not be jointly violated (or never be violated) in which case no primary bear market would be signaled. More about the different scenarios and how this time (should there be any primary bear market signal) the classical Dow Theory could be earlier than Schannep’s here (which is no flaw in Schannep’s Dow Theory, as its very rules say that “classical” Dow Theory signals are to be taken into account as well).

GOLD AND SILVER

The primary trend is bullish, as reported here and here.

The secondary trend is bearish (secondary reaction against the primary bull market), as explained here.


On June 9th, SLV and GLD set up for a primary bear market signal, as explained here. Subsequent market action has not changed the current picture.


 GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here

The most recent decline experienced by SIL and GDX did not qualify as a secondary reaction. Recent confirmed higher highs have set the clock for a secondary reaction to zero (more about it here).


Sincerely,
The Dow Theorist


Friday, June 10, 2016

Dow Theory Update for June 10: Gold and Silver have set up for primary bear market signal.





Trends unchanged.


I am writing before the open of June 10th

US STOCKS

The primary trend (as determined by Schannep’s Dow Theory) is bullish, as explained here and here.

The secondary trend is bearish (secondary reaction), as explained here.

As I alerted here, US stocks have set up for a primary bear market signal. The Industrials (and also the SPY) have also rallied by more than three percent. Thus, unambiguously the set up for a primary bear market is beyond questioning. However, at the same time, it seems more likely that such strong rallies (while setting up the market for a primary bear market signal) are harbingers of a break up above the last recorded primary bull market highs of April 20th. We will not jump the gun, and wait for market action. Until now only the SPY (and S&P 500) has broken up its previous primary bull market highs. Thus, anything may happen.


Please mind that a setup for a primary bear market does not imply that a primary bear market is certainly coming. The secondary reaction closing low may not be jointly violated (or never be violated) in which case no primary bear market would be signaled. More about the different scenarios and how this time (should there be any primary bear market signal) the classical Dow Theory could be earlier than Schannep’s here (which is no flaw in Schannep’s Dow Theory, as its very rules say that “classical” Dow Theory signals are to be taken into account as well).

GOLD AND SILVER

The primary trend is bullish, as reported here and here.

The secondary trend is bearish (secondary reaction against the primary bull market), as explained here.

Yesterday, June 9th, SLV and GLD rallied again. SLV has rallied 8.57% from its secondary reaction closing lows (June 1st), and hence, it has set up both SLV and GLD for a primary bear market signal. My volatility-adjusted readings tell me that the minimum movement for SLV amounts to 8.51% (I calculate de 30 days average of the daily percentage change for both SLV, GLD and the SPY, and I divide SLV’s average by that of the SPY; same with GLD).Thus, SLV has exceeded the minimum volatility threshold.

GLD has rallied  4.87 from its May 27th secondary reaction closing lows. The volatility-adjusted minimum movement for GLD stands at 5.12%

Thus, GLD has not managed to reach the “minimum” threshold. However, as I have repeatedly explained the principle of confirmation does not apply when establishing the setup for a primary bull/bear market signal. Just one index is enough to setup both metals (or stocks) for a new signal. More about the nuances concerning the principle of confirmation here.


Thus, now we can say that precious metals (gold and silver) have set up for a primary bear market signal. Please read my above comments for US Stocks making clear that a setup for a primary bear (bull) market signal does not necessarily imply that the signal will be flashed.


 GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here

The most recent decline experienced by SIL and GDX did not qualify as a secondary reaction as explained. Recent confirmed higher highs have set the clock for a secondary reaction to zero (more about it here).


Sincerely,
The Dow Theorist