Friday, October 9, 2015

Dow Theory Update for October 9: The primary bull market for US stocks signaled on Oct. 7 unambiguously confirmed

Trends in precious metals unchanged

Yesterday, I acknowledged that a primary bull market had been signaled. However, I acknowledge it grudgingly, as the S&P 500 just exceeded its September 16th closing highs by a hair and the SPY was lagging behind. Based on that, I gave a list of technical reasons that might advocate for caution (namely, wait one day or two, until we see a little bit more strength). I also wrote yesterday that:

“Please mind that if either the S&P 500 had clearly broken up (either in extent, or at least “time," that is being, let’s say, three hours above the critical level) or the SPY had broken up, even by one cent, I would have honored the signal, no questions asked, and no additional technical bullshit would have been given by this blogger truly yours.”

Well, both the S&P 500 and the SPY showed remarkable strength yesterday, so my qualms and my technical bullshit give way to the Dow Theory: The September 16th closing highs have been amply bettered by all indices, ETFs, you name it. Even the lagging Transports have confirmed (and, their confirmation was not necessary under Schannep’s Dow Theory, but, of course, their confirmation lends even more credence to the new bullish market condition.

I don’t know whether this is going to be a failed signal given the somewhat pessimistic technical background I was depicting yesterday. What I know is that the Dow Theory overrides all other technical considerations, and it beats the pants off all other technical devices when it comes to determining the primary trend (1-2 years) of stocks and other assets. Yes, I wrote, “other assets," as Hamilton, one of the fathers of the Dow Theory, wrote in his book “The Stock Market barometer” that the Dow Theory may be applied to foreign stock indices and even to gold and other markets. More about Hamilton’s vital insight here.

The last recorded primary bear market closing lows of 08/25/2015 constitute our “exit” of Dow Theory stop loss. If such lows were jointly violated, a primary bear market would be signaled again. Please mind that this has been a quite narrow setup (which is good, as it contains losses, if the trade is a loser, but also bad, as we have a quite narrow stop more prone to whipsaws), as the closing lows are -6.48% below of the close of October 7th (day of the original Schannep’s Dow Theory signal).

One thing is clear: Once again, you see the ability of Schannep’s Dow Theory to detect a change of trend long before moving averages react. Currently, the S&P 500 is well below the 200 days moving average. Of course, I could be a failed signal, after all ca. 30% of the signals end up with losses, and detractors could say that the Dow Theory was too early. However, we don’t have to look at a single trade. When we look at all the Dow Theory track record (more about it here) we know that the Dow Theory is clearly superior to moving averages. It gets earlier “in” and “out” and it does it with more winning trades and containing losses much better, as explained here.

Here you have a chart depicting the current situation:

Primary bull market for US Stocks

By the way, if you look at the SPY (bottom of the chart), you may see that the primary bull market signal has been given at a level somewhat lower than that of the primary bear market signal of August 20th (red vertical arrows). This implies:

a) A hypothetical short would have made theoretically some money (I am against shorting long term for the reasons given here)

b)  For those exiting at the primary bear market signal, the re-entry price is lower, which translates into small additional profits, and superior drawdown protection, since on August 20th, nobody knew whether the decline was going to be short-lived or it was the harbinger of a big crash.


The primary trend is bearish as explained here.

The secondary trend is bullish, as SLV and GLD are in the midst of a secondary reaction against the primary bear market. Here you have a full explanation of a somewhat difficult secondary reaction.


The primary and secondary trend is bullish as explained here.

The Dow Theorist

Thursday, October 8, 2015

Dow Theory Update for October 8: Primary bull market signaled for US Stocks on Oct. 7

At least theoretically, as it has been a very dubious signal.

The S&P 500 closing high of September 16th, 2015 was 1995.31. Yesterday, October 7th, the S&P 500 closed above such a closing high by closing at 1995.83. Thus, the S&P 500 managed by a hair to exceed the closing highs of the secondary reaction, and by doing so confirmed the higher closing high already made by the Industrials on October 5th, 2015.

According to Schannep’s  Dow Theory for a primary bull market signal to occur, we just need the SPY and other index to break above the secondary reaction closing highs. Thus, even though, the Transports remain below its secondary reaction closing highs, a primary bull market has been signaled.

However, in the spirit of full disclosure, I must say that I have not acted on this signal. In other words, my short term trading remains with a “bear market filter," and the long term one remains flat, out of the market. I recognized yesterday’s signal as a valid Dow Theory primary bull market signal, but I also know that I have to exert judgment. After all, Schannep, as Rhea did in the past, in some instances knows when to “break” the rules. Thus, in January 2000 when both the Industrials and the S&P 500 made higher closing highs but the Transports refused to confirm, Schannep ignored the breakout (“Dow Theory for the 21st Century" pages 116 and 119 –note 4-). There are other such instances when Schannep exerted judgment.

So why in my private trading I am acting as if no breakout occurred?  There are many reasons which I will summarily list.

1) The SPY ETF, which is tries to reflect the S&P 500, and which I normally use for my Dow Theory readings, did not exceed the September 16th closing highs. While occasionally there may be small divergences between the two, yesterday there was a glaring divergence. On September 16th, the SPY closed at 200.18. On October 7th, the SPY closed at 199.41, that is 77 cents below the closing highs. Since the SPY is roughly ten times smaller than the S&P 500, 77 cents in the SPY is tantamount to 777 cents in the S&P 500, which equals 7.77 points for the S&P 500. Thus, we can perform the following math:

Closing high of Oct 7th: 1995.83


7.77 points (which would the S&P 500 equivalent of the difference between the SPY Sept 16th and Oct 7 closing highs)

Equals = 1988.06, which is clearly below the closing highs made by the S&P 500 on September 16th.

My gut feeling says that since many people had their eyes fixated on the September 16th closing highs, waiting to buy the breakout, there was an effort to levitate the S&P 500 price in the futures markets above the critical level. This is why:

a) it was a breakout by a hair.

b) It did not remain a long time above the critical level.

c) The SPY failed to follow suit (as arbitrage has some lagging). Here you have the chart (screenshot taken at 12:49 pm). The read horizontal line displays the critical level to be broken out. 

The SPY remains below its September 16th closing highs.

The mini S&P 500 (December contract) immediately after reaching the “higher” closing high, took a nose dive in after-hours trading, which seemed to confirm to me that the higher closing highs were somewhat frail.

Please mind that people look at the S&P 500 but in reality, they buy the SPY.

Having said all this, one thing is clear: Had the SPY exceeded its September 16 closing highs even by a mere cent, I would have acted on the signal.

2) Schannep’s technical big picture is bearish. In his last letter to subscribers he warned about a bearish crossover on the long term stochastic, a top in long term RSI, etc.

3) The stock market is short term overbought. I know that overbought conditions may persist longer than one expects, but, a pullback may develop from the current level any moment now.

4) The Transports are clearly below the September 16th closing highs. I know I don’t need three indices to confirm under Schannep’s Dow Theory. However, being confronted with a highly dubious higher closing high by the S&P 500, lack of confirmation by a less manipulated index, advocates for caution.

5) While the Dow Theory is not concerned with intra-day highs, it is worth noting that the Sept 17 highs have not been bettered (yes, intra day highs were made one day latter not on September 16th).

6) The SPY and the S&P 500 remain below the 200 and 50 days moving average, and both moving averages are currently declining. I know that the Dow Theory is more reactive than moving averages and, under “normal” signals, we do well disregarding moving averages, as we have a superior timing device (more about the superiority of the Dow Theory versus moving averages here). However, when confronted with a highly weak, both in extent and time (yes, time, the time that the higher closing high has effectively remained at that higher level, which has been negligible), the moving averages seem to be telling us: “Wait a little bit. If it is a real primary bull market, the market will continue to go up, and maybe tomorrow or the day after tomorrow you get a better quality signal”.

 7) While not strict Dow Theory I always keep an eye on the S&P500 advancing issues. Since September 30, the SPY has been edging higher, while the Advancing Issues has been declining. Such a divergence seems to suggest that the rally is petering out.  Higher highs in the index are not equaled by more advancing issues. Here you have a chart:

Advancing issues diverge from the SPY

8) Another indicator I monitor, the difference between new 52 weeks highs minus 52 weeks lows, has been slightly edging lower in the last three days, while the SPY was making higher highs. This tells me that there is no broad participation in this rally.

9) Such a lack of strength seems to be confirmed by the fact that stocks trading below the 200 day exponential moving average have made huge advances in the last few days. Are we just seen a short covering rally?

10) My misgivings about the lack of internal strength, have been confirmed by the blog of Dorsey Wright “Systematic Relative Strength." In his latest weekly recap, they noted that the bottom relative strength decile (that is the worst momentum stocks) clearly outperformed both the index and the high relative strength stocks (top decile).

9) While volume is to be taken always with a grain of salt, volume has been bearish. It increased in declines and decreased when the SPY was rallying.

10) The benefit of doubt is to be given to the existing trend (“the trend is your friend”), which is bearish.

Please mind that I am not giving you fundamental reasons for not having honored the primary bull market signal. I am not mentioning that, according to many pundits, stocks are overpriced, that according to Zero Hedge, the world is ending, etc. No: I just use as a prop technical knowledge.

Please mind that if either the S&P 500 had clearly broken up (either in extent, or at least “time," that is being, let’s say, three hours above the critical level) or the SPY had broken up, even by one cent, I would have honored the signal, no questions asked, and no additional technical bullshit would have been given by this blogger truly yours.

However, this was not the case.

Furthermore, I am practical. If I had taken the primary bear market signal, my Dow Theory stop would be lying ca. at -6.48% below yesterday’s close. This is an indeed narrow Dow Theory stop. While, this is good, since  our risk of loss is well contained, it increases the risk of a whipsaw. Hence, I say to myself: “Wait until tomorrow, or the day after tomorrow, for either the SPY to break up, or at least the S&P 500 to make a clear breakout. If I get somewhat late, I will maybe forgo 0.5% of performance (as I risk the SPY being higher than on the close of October 7th) but 0.5% is the price I willingly pay for: (1) a more confirmed trend, (2) a somewhat more ample stop, hence, less risk of whipsaw. If it is a real signal, sooner or later, I will see it on the chart. Furthermore,  I will see it at quite favorable price when compared with my Dow Theory stop. So wait.”

Furthermore, and this is very personal, my long term trading along with the primary trend does not involve buying the SPY, or any other similar ETF (i.e. equally weighted S&P 500). When I get a “green light” (primary bull market) I am interested in high momentum stocks, and as I have written above, such stocks are currently laggards. In other words, the stuff I am interested in, is in relative terms “cheap." I don’t need to rush, because high momentum stocks are not currently going to the moon. If today by the close or tomorrow I get a “buy” signal, I need not worry.

The Dow Theorist

Monday, October 5, 2015

Dow Theory Update for October 5: Primary bull market for mining stocks and Chinese stocks signaled today

Secondary trends changed (bullishly) in gold and silver

Well, it seems that trends in all markets are changing. Today there is plenty of information to digest. Stocks (both US and Chinese) undergoing a secondary reaction against a primary bear market. I apologize to my readers for not having given updates as to the secondary reactions, since my time has been in short supply (as usual). However, I have not missed the “meat," which is primary bull and bear market signal. After all, secondary reactions are our “pivot” or reference points which we use to determine whether the primary (the important one) trend is bullish or bearish.

Chinese Stocks

On 08/24/2015 both the FXI and HAO made lower closing lows. From that point, the HAO started a rally whose closing high was made on 09/16/2015 (closing price 24.18). The HAO rallied for 16 trading days.

FXI made a lower closing low on 09/04/2015 which was not confirmed by the FXI. Lower lows without confirmation tend to show that the ongoing trend (bear market in this case) might be running out of steam. From such lows the FXI rallied for 7 days until 09/16/015 (closing price 24.18), thus confirming the rally undergone by HAO. 

All in all, lower lows in the direction of the primary trend (bearish) were not confirmed, whereas higher highs in the direction of a counter movement were confirmed. While this does not change the primary trend (bearish), it is a warning sign that things might change.

Therefore, both the FIX and HAO have rallied for an average of (16+7)/2 = 11.5 days.

This is enough time (more than 8-10 trading days) to label such a rally as a secondary reaction against the primary bear market.

What about the extent requirement necessary for a secondary reaction to exist?

As you can see in the spreadsheet below the FXI advanced by 11.79% and the HAO by 13.61%. You know I like to adjust for volatility, as the minimum 3% movement dictated by the Dow Theory was thought for US stocks, which are less volatile than Chinese stocks. More about volatility adjustments here.

I performed the volatility adjustment the following was. I took the exponential moving average of the daily percentage change of the FXI/HAO. I calculated the 30-day exponential average of such daily changed and compared it with its equivalent in the SPY. Accordingly, the minimum movement for the FXI was 5.34% and for the HAO 7.05%. They were amply exceeded.





% change


Min adjusted volt move


All in all, both the time and extent requirement have been met, and hence unambiguously we can declare a secondary bullish reaction in Chinese stocks, all the gloom and doom notwithstanding.

Things get more interesting when we see what happened after the 9/16/2015 closing highs. Both Chinese ETFs declined. The decline amounted to -7.85 for the FXI and 5.58% for the HAO, which more than exceeds the minimum move in volatility adjusted terms.

Such a pullback (which need not be confirmed, more about it here), set up stocks for a primary bull market signal. Now, if the 9/16/2015 closing highs are jointly bettered on a closing basis, a new primary bull market would be signaled.

Last Friday10/2/2015 HAO closed above its secondary reaction high of 9/16/2015. Today, FXI has confirmed, and hence a primary bull market has been signaled.

Here you have an updated chart (the blue rectangles display the secondary reaction and the orange ones the pullback that followed that set up Chinese stocks for a primary bull market signal).

Primary bull market for Chinese stocks signaled today

Furthermore, this signal is a rather “tradable” one, since our stops lay at the last primary bear market lows which are located at “reasonable” levels. By “reasonable” I mean that our Dow Theory trailing stop is a quite narrow one (around 11.79% and 13.36%). It has nothing to do with the “Chinese situation” I referred to here. More about the Dow Theory trailing stop, here.

I don’t know whether it is going to be a failed signal or something more important is going on. What I know is that from a Dow Theory perspective things have technically changed. Furthermore, I also see that the precious metals universe seems to be getting bullish. Are the markets seeing signs of reflation worldwide?

What happens to Chinese stocks partially affects the behavior of US stocks, and since the latter have also set up for a primary bull market signal, we better keep paying attention to both countries.


The Industrials broke above its secondary reaction closing highs, unconfirmed by the SPY and the Industrials. So, no primary bull market yet.

The primary trend is bearish, as was explained here and here.

The secondary trend is bullish (secondary reaction against primary bear market), as explained here.

 Furthermore, US stocks set up for a primary bull market signal, as explained here:

If the ongoing rally managed to jointly better the 9/16/2015 closing highs (please mind that the Chinese stocks made their last highs on the same date), a primary bull market would be signaled.


The primary and secondary trend is bearish as explained here.

The secondary trend is bullish, as SLV and GLD are in the midst of a secondary reaction against the primary bear market.

Off the closing lows of 08/03/2015 SLV rallied by 6.85% until 08/12/2015. It rallied for 7 trading days. Off the closing lows of 08/05/2015 GLD rallied by 6.92%. So GLD rallied for 12 trading days. The average time for the rally was (7+12)/2= 9.5 days. While I’d have been happier seeing SLV rallying a little bit longer, I feel that we can accept the “time” requirement for a secondary reaction as fulfilled.

On the other hand, the extent requirement has been fulfilled too. I don’t have the time (and neither have my readers, as this is a long post) to give you the details concerning the volatility-adjusted measurements, but both rallies in the vicinity of 7% amply exceed the minimum movement.

Nevertheless, it is not the most “perfect” secondary reaction, since the modest rally that emerged from the last confirmed recorded lows (8/3/2015, and 8/5/2015) was affected by a non-confirmation and divergence, namely, GLD was going up and SLV refused to confirm and even started to decline. Thus, given that the time requirement was barely met and that the latest highs made by GLD were not confirmed by SLV, I feel it is a slightly debatable secondary reaction.

In spite of all my qualms, there are the following aspects which weight on the bullish side:

a) On August 26, 2015 SLV made a lower closing low, unconfirmed by GLD. Thus, a new primary bear market low, unconfirmed, increases the odds for a reversal of trend, at least of secondary proportions (which gives more validity to the secondary reaction I reluctantly spotted).

b) Furthermore, the sequence higher high unconfirmed followed by lower low unconfirmed tends to be finally bullish when the last recorded highs are finally jointly broken up. Many traders get caught on the wrong foot (when first long, and were whipsawed, then reversed and went short, to be forced to cover), and the final move tends to be strong. We saw this in Chinese stocks in 2014, when a higher high unconfirmed and a lower low unconfirmed set up such stocks for an explosive up move (ca. 30% with no intervening breather, namely a secondary reaction after the breakout). As I wrote here:

“So the Chinese stocks market was caught with a double non confirmation. On the one hand, there was not enough bullish thrust to re-confirm the primary bull market; on the other hand, there was not enough bearishness for a primary bear market signal to be signaled. As always, the benefit of doubt is to be given to the existing primary trend, and hence, the primary trend remained bullish during these weeks of non-confirmations. The price action of FXI and HAO reminds me the words of Market Wizard trader Minervini, who wrote in his book "Trade Like a Stock Market Wizard" that quite often explosive moves are preceded by a shake out. Lower unconfirmed lows fit quite well within the definition of a "shake out".”

 Both SLV and GLD underwent a significant pullback after making their secondary reaction highs. Such a pullback set them up for a primary bull market.

SLV has broken up its secondary reaction lows (displayed as a red horizontal line). GLD, though, has failed to confirm, and hence we cannot declare a primary bull market.

So now, we have to wait. Either GLD deigns to confirm and a primary bull market will be signaled in gold and silver, or the primary bear market lows are jointly violated in which case the primary bear market will be reconfirmed.

Here you have an updated chart. The blue rectangle displays the secondary reaction against the primary bear market and the red lines show the relevant levels to be broken up for a primary bull market to be signaled.

SLV and GLD in a secondary reaction and set up for primary bull market


Today the primary trend turned bullish.

Take a look at the chart below.

Primary bull market for SIL and GDX signaled today
GDX and SIL made its primary bear market lows on 8/26/2015. From that point GDX and SIL it rallied for 2 day until 08/28/2015, which of course, is not a secondary reaction (as two days do not fulfill the “time” requirement). Hence, on 8/28/2015 we didn’t have a secondary reaction. From that point GDX and SIL started to decline. SIL made a lower low unconfirmed on 9/10/2015. From that date it started to rally until 9/18/2015. On that date, both GDX and SIL made higher highs. Furthermore, if we measure the time elapsed from each respective primary bear market low, we see that SIL rallied for 6 days (or 16 days, if we consider as the only valid low to consider the last confirmed one, which is debatable, as explained in a similar difficult technical juncture here). GDX rallied for 16 days. Even if we take just 6 days for SIL (instead of 16), the average advance for both ETFs was (6+16)/2 = 11 trading days, which fulfills the “time” requirement for a secondary reaction.

As to the extent requirement, the spreadsheet below says it all.





% change


Min adjusted volt move


SIL rallied 10.91% and GDX rallied 11.04%., which amply exceeded the volatility-adjusted minimum move (based on 30 days exponential average of daily percentage change close-to-close).

All in all, both the time and extent requirement for a secondary reaction had been met for SIL and GDX

Subsequently, both ETFs underwent a pullback (which was volatility-adjusted meaningful) that set them up for a primary bull market signal.

On 10/02/2015 GDX broke above its 9/18/2015 secondary reaction closing highs. SIL has done so (and confirmed) today.

Hence, a primary bull market has been signaled today.

As with Chinese stocks, this signal is a rather “tradable” one, since our stops lay at the last primary bear market lows which are located at “reasonable” levels. By “reasonable” I mean that our Dow Theory trailing stop is a quite narrow one (around 11%).


1) Chinese stocks: Primary trend turned bullish today.

2) GDX and SIL (gold and silver ETF miners): Primary trend turned bullish today.

3) GLD and SLV (gold and silver): Secondary trend bullish. Primary trend remains bearish.

4) US Stocks: Secondary trend bullish. Primary trend remains bearish.

The Dow Theorist