Thursday, July 21, 2016

Dow Theory Update for July 21: Two typical Dow Theory misconceptions (II)





And setting the record straight


I am writing before the open.

Misconception 2: Lack of confirmation suffices to change a trend


A recent article post on Zero Hedge with the bombastic title “The One Key Indicator Pointing To A Bear Market” makes two errors.


The first one is to assume that the market is still under a primary bull market. It seems that the author is out of gear with the primary trend, as the market turned bearish already on June 24th, as it was explained here.

Furthermore, the primary trend was signaled by both the “classic” Dow Theory (just two indices and stricter time requirement to declare a secondary reactions) and Schannep’s Dow Theory. Thus, there is no excuse for ascertaining the primary trend.

The second error, which is the second misconception I want to address, is to consider that the bull market (assuming for the sake of argument there is still one, which is not the case) may be about to change due to the current Transports lack of confirmation. Even if one’s interpretation of the Dow Theory may lead the practitioner to believe the primary trend remains bullish, I must say that higher highs (or lows) not confirmed do not suffice to change any trend.

Lack of confirmation merely implies that the trend which is not being confirmed becomes suspect. Thus, if we (wrongly) assume that the primary trend is bullish, lack of confirmation merely means that it may (“may” not “must”) lead to a secondary reaction. Of course, by luck, it can also lead eventually to a primary change of trend. However, in real time, nobody knows whether it will lead to a change of the primary trend; at best, lack of confirmation increases the odds for a secondary reaction. It is true that Rhea wrote that the principle of confirmation is more important at critical junctures (i.e. when a primary bull/bear market may be about to change). However, it takes more than a lack of confirmation of the primary thrust to change a primary trend from bullish to bearish and vice versa. We need a counter movement and the breaking out (now confirmed) of the relevant closing highs or lows. Which are the “relevant” closing highs or lows? There are only three relevant highs or lows, as it was explained in the previous post. Any other highs or lows which you may read or be applied elsewhere is humbug.  More about them here:


The takeaway under the current market juncture is as follows: The primary trend is bearish. Higher closing highs (breakout of the primary bull market highs of April 20) by the Industrials unconfirmed by the Transports, merely implies:

a) The Trend has not changed to bullish due to the lack of confirmation.

b) The secondary trend (the bullish secondary reaction against the primary bear market) may be running out of steam. The longer it takes for the Transports to confirm the more likely for the primary bearish trend to reaffirm itself, and hence more likely for us to see a new primary bear market swing..

The two misconceptions I have mentioned in these two posts lead many Dow Theorists astray. Half-truths badly digested are likely to be misleading.

US STOCKS

The primary trend turned bearish on June 24th, as was profusely explained here.

The secondary trend is bullish (secondary reaction against the primary trend), as all three indices (Industrials, Transports and SP 500) have been rallying for more than 8 trading days (average of the three indices) and each of them has rallied more than three percent. As of this writing we don’t know whether we can declare the end of the secondary reaction, as no index has pulled back more than 3%.

As I explained here, if the Transports were to break out above their April 20th closing highs (primary bull market highs), a primary bull market would be signaled. The longer it takes for the Transports to confirm the SP 500 and Industrials higher highs, the more likely a decline is in the making.

GOLD AND SILVER

The primary trend is bullish (Dow Theory signal of March 17th, 2016), as reported here and here.

The secondary trend is also bullish as explained here



Recent declines do not fulfill the time requirement for a secondary reaction yet (or never). Given that the time requirement for a secondary reaction has not been met, I don't bother with calculation the "extent" requirement, as I need both to declare the existence of a secondary reaction.


GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here, and more recently here



Recent declines do not fulfill the time requirement for a secondary reaction yet (or never). Given that the time requirement for a secondary reaction has not been met, I don't bother with calculation the "extent" requirement, as I need both to declare the existence of a secondary reaction.

Sincerely,
The Dow Theorist