Dow Theory update for May 20: Gold and silver's colossal outside reversal bar

 Stocks’ rally stalls

Let’s get started with our Dow Theory commentary for today.

Stocks

The SPY, Industrials and Transports closed down. The primary and secondary trend is bullish.

Volume was lower than Friday’s, which, once again, has a bullish connotation.

Gold and Silver

Gold and silver closed up. They didn’t only close up, but they did so by means of an outside reversal bar, which is, at bottoms, tends to be the harbinger of a rally of, at least, moderate proportions. However, you know that this Dow Theorist of yours tends to be kind of faithful to the Dow Theory tenets, and, accordingly, I am not in the business of calling either tops or bottoms. I am merely interested (and that’s already a big feat) in spotting changes of trend relatively early with a modicum of competence. Until this happens, and although I am not blind, and I know the meaning of an outside reversal bar, I will not yield to temptation and declare a change of trend (not even of secondary proportions). Such reluctance to deviate from the Dow Theory has paid me well during this secular bear market as you can read here

So, for now, the primary and secondary trend of GLD and SLV is bearish.

GDX and SIL, the gold and silver miners ETF, closed up and by means of a reversal bar too. Let’s see what happens. In the meantime, the primary and secondary trend remains bearish.

Here you have the figures of the markets I monitor for today. As you can read in my May 17, 2013 post “Introducing Schannep’s Stoploss for the stock market”, which you can find here, now we have two alternative stops. One strictly derived from the Dow Theory (primary bear market lows) which currently stands at 7.63%; the other one derived from Dow Theorist Schannep, which stands at a modest -3.99%. Personally, and being fully convinced by the solidity of Schannep’s work, my choice stands at-3.99%.

 

Data for May 20, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Last close		05/20/2013	166.93
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.29%	23.01%	7.63%
Alternative Schannep's stoploss:
Highest closing high		05/17/2014	166.94
16% stoploss from highest closing high			140.23
		Max Pot Loss %
		-3.99%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Exit December 20		12/20/2012	161.16
Current stop level: Sec React low		11/02/2012	162.6
Realized Loss %	Tot advance since start bull mkt
0.39%	7.83%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Exit December 20		12/20/2012	29
Current stop level: Sec React low		11/02/2012	29.95
Realized gain %	Tot advance since start bull mkt
0.28%	13.15%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Exit January 23		01/24/2013	21.69
Current stop level: Sec React low		11/15/2012	21.87
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-0.64%	26.99%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Exit January 23		01/24/2013	44.56
Current stop level: Sec React low		12/05/2012	45.35
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-6.72%	12.64%	20.75%

Sincerely,

The Dow Theorist

Dow Theory special issue: Introducing Schannep's stoploss for the stock market

In my previous post, I made some observations concerning the unrealized gains made by those following the primary bull market signal in the stock market.

I finished my observations by mentioning two tools to help the investor avoid devastating losses (or to lock in profits) if the trend suddenly reverses.

One of this “tools” is what I label the “Dow Theory’s trailing stop”, of which I wrote here, which you can visualize in the following chart (red horizontal lines):

Red horizontal lines shows were the Dow Theory stoploss currently stands

This is the most commonly occurring “stop”, as it is based upon the existence of a secondary reaction. The essence of it is as follows: In a primary bull market, once a secondary reaction has been established, and a rally follows after it, if the lows of the secondary reaction are jointly violated a primary bear market (sell signal) is signaled. As a primary bull market progresses, new secondary reactions develop with higher lows and, accordingly, the “Dow Theory trailing stop” moves higher locking in more profits (or reducing the amount of likely losses). For a deeper explanation, please read this post.

However, there is a “catch” with the “Dow Theory trailing stop”: it requires the development of a secondary reaction. And, alas, within the current primary bull market such secondary reaction has not developed yet. 

Since the bull market started in mid November 2012 and the primary bull market signal was flashed on January 2, 2013, no secondary reaction has occurred. Accordingly, we don’t have a “Dow Theory trailing stop” in place. Thus, our stop lays at the Mid November 2012 lows, which entails a worst-case loss close to 7.63% (percentage loss from the entry point at 146.02, and the bear market lows at 135.7). In other words, the lack of a secondary reaction has us exposed to a killing loss (all the unrealized profit now standing at 14.30% wiped out plus the ca. 7.63% loss) in case the stock market starts falling with no intervening secondary reaction. While it is unlikely a decline exceeding 21% (14.30+7.63) not being preceded by a secondary reaction, it might happen.

However, if we follow Dow Theorist Schannep, there is an alternative way to cut losses short (or to realize profits) if the market reverses, which is especially apt in cases (as ours) when the market goes higher and higher and no secondary reaction occurs and, thus, we are prevented from raising our “Dow Theory trailing stop”. Schannep has observed that when both the S&P and the Industrials decline 16% from their highs, there was a further average loss of 12% until the finals lows were made (“Dow Theory for the 21^st Century", Pages 63-64, Table 6.1). You can buy Schannep’s book, which, in my opinion, ranks among the best Dow Theory books, here.

Therefore, if we were to place a 16% stop below the current closing high at 166.94 for the SPY, our stop loss would be at 140.23, which is significantly higher than the current stop loss placed at the Mid November 2012 primary bear market lows at 135.7.

If we accept such new “Schannep’s” stop at 16% below the highest highs recently made, then our maximum potential loss would stand at:

Entry point (bull market signaled) = 146.06

Exit point (-16% stop loss from highest closing high) =140.23

Maximum potential loss: -3.99%

I am not advocating for discarding the current stop loss established by a strict application of the Dow Theory (last recorded bear market lows) in favor of the “Schannep’s” -16% stoploss from the last recorded highs. Each investor must cogitate and decide which stop to follow. This Dow Theory blog is no substitute for matured and independent thought. One thing is clear, though. Schannep’s observations are well rooted in empirical evidence, and 16% is an ample stop when investing along stock indices like the SPY or the Industrials. Moreover, in many instances (when secondary reaction lows are made and not subsequently broken) the “Dow Theory trailing stop” tends to be tighter. Thus, finding protection at -16% from the highs is not an absurd idea. Russell himself, very often, recommends a stop loss of only 10%.

Since now we have two alternative “exit” scenarios, which will change with subsequent price action, I have modified the spreadsheet which I usually display at the end of my posts. From now on (until market conditions change and make the Schannep's stop redundant), I will display the two alternative exit points. The one derived by the strict application of the Dow Theory and Schannep’s.

Data for May 17, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Last close		05/17/2013	166.94
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.30%	23.02%	7.63%
Alternative Schannep's stoploss:
Highest closing high		05/17/2014	166.94
16% stoploss from highest closing high			140.23
		Max Pot Loss %
		-3.99%

Have a wonderful weekend.

Sincerely,

The Dow Theorist

Dow Theory Update for May 17: Primary bear market re-confirmed for gold and silver

Evaluating the unrealized gains hitherto made in SPY by the current primary bull market signal.

 

It is time to make a small recap about the current primary bull market signal and the unrealized profit hitherto made by those following the Dow Theory. It is also time to take a closer look at our stop loss (which will be the subject of a separate post).

As you can see in the spreadsheet below, the bull market was signaled on January 2^nd, 2013. The SPY stood at 146.06.

On May 17, 2013, the SPY closed at 166.94, which amounts to an unrealized profit of 14.30% (see spreadsheet below for further details).

The word “unrealized” must be stressed, though. No time to get over excited. Thus, if the market corrects, most of this paper profits may evaporate. While it is always tempting to sell out and cash some profits, this is not the proper procedure under the Dow Theory (of any flavor whatsoever). We should not forget that trends tend to last longer than expected and, accordingly, the odds favor the continuation of the trend and, with it, the building up of further profits. Within this context, it bears repeating that we are dealing with a young primary bull market both in duration (only 4 ½ months since it was signaled) and extent (14.30% gain). While nobody can predict the future, we know (as I wrote here) that:

The average duration of each transaction taking according to the classical Dow Theory lasted 712 days. This is slightly less than 2 years.

The median duration amounts to 565 days, which is roughly 1.5 years.

The shortest investment lasted only 60 days (year 1990).

The longest investment lasted 2799 days (secular bull market 1900-1998).

As to the average gain made by following each primary bull market signal, it stands for the classical/Rhea flavor at an average 32.33% (according to the Dow Theory track record since 1897). In a future post, I will provide the followers of this Dow Theory blog with additional details as to the average primary bull market signal gain (with breakdown depending on secular bull and bear market conditions). However, here it suffices to say that if we may reasonably expect to gain 32.33% (average return in the last +110 years), and we have just made less than 15% of unrealized profits, the odds favor a further buildup of gains.

Thus, we can conclude: The current primary bull market signal of January 2, 2013 (or January 18, if the signal is to be determined according to the “classical/Rhea” flavor of the Dow Theory) is still “young." 4 and ½ months versus an average duration of almost 2 years, is clearly a young bull market. The unrealized gain is still less than half the average primary bull signal gain.

Under these conditions, it seems clear to me that we have to have the stomach to endure the coming secondary reaction (one day it will come, as it is overdue) since the odds favor the resumption of the primary bullish trend after the secondary reaction runs its course. Getting out too soon is a dangerous proposal. To avoid devastating losses (or to lock in profits) if the trend suddenly reverses, it is neither necessary, nor advisable to prematurely exit trends, as we have a couple of tools in our Dow Theory arsenal to accomplish this goal. More about such “tools” in a post that I hope to publish this weekend. Readers of this Dow Theory blog stay tuned.

Stocks

The SPY, Industrials and Transports closed up. The primary and secondary trend is bullish.

Today’s volume was higher than yesterday’s, which is bullish, as higher prices were confirmed by rising volume. The overall pattern of volume remains neutral, as the volume bullish action of the last few days is neutralizing past bearish readings.

Gold and silver

The gold and silver universe rout continues.

GLD closed down. So did SLV. GLD closed below the 04/15/2013 closing lows, thereby re-confirming the primary bear market signals and turning the secondary trend as bearish. Here you have an updated chart that says it all:

Primary bear market re-confirmed in SLV and GDX.

 

It is pertinent to remember that on December 20, 2012, I first alerted my readers about a primary bear market in gold and silver, as you can read here.

As to GDX and SIL, the gold and silver miners ETFs both closed down and violated their most recent primary bear market lows. GDX and SIL, in their abject weakness, unlike gold and silver, were unable to stage even a secondary bullish reaction against the primary bearish trend. Thus, the primary and secondary trend remains bearish.

Here you have the figures of the markets I follow for today.

 

Data for May 17, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Last close		05/17/2013	166.94
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.30%	23.02%	7.63%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Exit December 20		12/20/2012	161.16
Current stop level: Sec React low		11/02/2012	162.6
Realized Loss %	Tot advance since start bull mkt
0.39%	7.83%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Exit December 20		12/20/2012	29
Current stop level: Sec React low		11/02/2012	29.95
Realized gain %	Tot advance since start bull mkt
0.28%	13.15%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Exit January 23		01/24/2013	21.69
Current stop level: Sec React low		11/15/2012	21.87
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-0.64%	26.99%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Exit January 23		01/24/2013	44.56
Current stop level: Sec React low		12/05/2012	45.35
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-6.72%	12.64%	20.75%

Sincerely,

The Dow Theorist.