Saturday, August 20, 2016

Dow Theory Update for August 20: Recent declines in Gold and Silver (and their ETF miners) do not qualify as a secondary reaction yet





Future important post


When I find time (oh time!!!), I’d like to write about the market conditions where the Dow Theory (and specially Schannep’s Dow Theory) might “suffer” and underperform buy and hold. In previous studies (see here), I have shown that the Dow Theory tends to underperform buy and hold when markets display nice up trends (of course, if the market only goes up, nothing is better than buy and hold) whereas most of the outperformance is predicated on declining markets (where buy and hold losses big, and the Dow Theory cut losses short, and opportunistically buys at a much lower "post crash" price). However, I'd like to further deepen this issue, as there is a third market condition which (while not fatal) may result in temporary underperformance for the Dow Theory and demoralize does not really acquainted with the “guts” and inner workings of the Dow Theory.


Of course this “third market condition” afflicts all Trend following strategies. Furthermore, the Dow Theory is very well endowed to ride through the adverse condition quite successfully, as “underperformance” does not mean losing one’s shirt (as does buy and hold when the market crashes).

US STOCKS

The primary and secondary trend is bullish as explained here and here


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 in SLV and GLD do not qualify as a secondary reaction. The time extent has not been met (GLD just declined 7 trading days and currently stands above the last minor recorded closing low July 20th).

Find below an updated chart which displays all price action since the primary bull market signal of March 17th, 2016 (left side of the chart). As you can see there was a secondary (bearish) reaction (red rectangle in the middle of the chart) against the primary bull market which was resolved by confirmed higher highs. Thus, the primary trend is bullish. The current decline (small blue rectangles on the right side of the chart) are a mere minor decline. 

The current decline does not qualify as a secondary reaction
 

GOLD AND SILVER MINERS ETFs

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

SIL and GDX have been relentlessly making higher highs. Recent declines do not qualify as a secondary reaction. The chart below displays SIL and GDX price action since the primary bull market signal of March 3rd, 2016. As you can see hitherto no secondary reaction has occurred yet. The small blue rectangles on the right side of the chart display the ongoing decline, which, I have said, does not qualify as a secondary reaction against the primary bear market. 

 
Powerful primary bull market swing: A secondary reaction has not occured yet

Sincerely,
The Dow Theorist

Monday, August 15, 2016

Dow Theory Update for August 15: More on the primary bull market signal of August 11, 2016



Trends in precious metals universe unchanged


US STOCKS
 
As it was reported here, last August 11th a primary bull market was signaled according to Schannep’s Dow Theory.


Here you have un updated chart.

 
Schannep's Dow Theory signaled primary bull market on August 11

It is important to note that the “Rhea/Classical” Dow Theory has not signaled a primary bull market yet. Why? Because the Transports remain below their July 14th secondary reaction closing highs. Since the “classical” Dow Theory only uses the Industrials and Transports, the failure of the Transports to better its secondary reaction highs implies no signal. Of course, it could be argued that Schannep’s Dow Theory is “too reactive”.  If past performance is to serve us as a guide, the “over reactiveness” of Schannep’s Dow Theory clearly outperformed the “Rhea/classical” Dow Theory. Both in terms of average performance (ca. +2% p.a.) and drawdown reduction. More about the comparison between both Dow Theory flavors here.


Thus, like in short term trading. We don’t know in advance the outcome of any given trade. This specific one might be a false signal whereas the classical Dow Theory by not signaling a primary bull market would look "smarter" this time. However, we have to look at the long term record, which clearly favors Schannep’s Dow Theory. Of course, it could be argued that past performance is no guarantee of future performance, and, hence, that the “Rhea/classical” Dow Theory is likely to outperform Schannep’s Dow Theory in the future. This could happen, but, as I wrote here, I find it very unlikely:

“I’d say that the very structure of Schannep’s Dow Theory is likely to continue outperforming the “classical” Dow Theory in the future. By design Schannep’s Dow Theory is more responsive (i.e. detects earlier the onset of a new trend) because:
1)     It uses three indices (it includes the S&P), instead of just two, whereas it requires just two indices confirming. 
2)  The definition of secondary reaction (which is vital to determine breakout points, which in turn, define primary and bear market signals) is “shortened” as, 10 days, or even less, is enough to qualify a movement as a secondary reaction. 
3)     In the same vein, by doing away with the 1/3 to 2/3 retracement rule (which is one of the requirements under classical Dow Theory for a secondary reaction to exist) and merely requiring a 3% move, many movements which under classical Dow Theory escape the definition of secondary reaction are labeled as such under Schannep’s Dow Theory. 
Thus, the very make up of Schannep’s Dow Theory makes it foreseeable that in the future it will continue to cut losses short (that is detecting earlier changes of the primary trend) because its very rules are designed to spot secondary reactions in an early fashion.
Of course, critics could say that everything comes at a price, and that premature labeling of secondary reactions makes Schannep’s Dow Theory prone to false signals or worse yet, reduced profits. 
However, such objections have been exhaustively debunked during this “face off” saga. Schannep’s rules, while being “early” both in signaling entries and exits, manages to increase profits, not reduce them.”

Therefore, it is perfectly possible for this specific trade to be a loser which would make look the classical Dow Theory “wiser” for having avoided this specific trade. However, I am focused on the long term record.

Of course, if the current signal is a valid one (by "valid" I mean that the trade is closed at a profit), then the “Rhea/classical” Dow Theory would look “dumb” as the primary bull signal would come later, and hence signaling an entry at a higher price.

The current signal offers a moderately bad risk reward ratio. The entry price for the SPY was 218.65 (close of August 11). Since the primary bear market closing lows of June 27th (199.60) the SPY has rallied 9.54%. Hence, our initial stop loss (more about the Dow Theory stop loss here) lies at -0.087% (This is the percentage decline from 218.65 to reach 199.60). Thus, the entry comes at a slighter higher level than the average entry which tends to be at ca. 7.4% of the primary bear market lows. On the other hand, and while nobody can predict the extent or duration of a primary bull market (Rhea dixit), I feel quite leery as to the “old-age” of current bull market cycle, which seems to reduce the “reward” (extent) side of the risk/reward ratio. Furthermore, the primary trend, as determined by weekly bars, remains bearish. Thus, the misgivings I expressed concerning the preceding primary bear market signal of April 13 remain fully applicable.

However, as I wrote on April 14th, 2016, the fact that I am leery about the signal does not imply that I will override it. Nonetheless, what works for me does not necessarily work for others. Each investor should do his own homeworks.


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


GOLD AND SILVER MINERS ETFs
 
The primary and secondary trend is bullish as explained here, and more recently here




Sincerely

The Dow Theorist

Friday, August 12, 2016

Dow Theory Update for August 12: Primary bull market signaled yesterday



I don’t have much time to write since I am travelling.

However, yesterday, October 11, at the close, a primary bull  market was signaled according to Schannep’s Dow Theory, as the Industrials finally bettered their secondary reaction closing highs, and thus confirmed the SP 500. More about the setup that led to the signal here and here.


 With luck, I’ll plan to delve further into this signal next week.

Sincerely,

The Dow Theorist