Dow Theory update for Sept 21: Transports give a warning

However, both primary and secondary movement remain bullish

As to the stock market, the Industrials, SPY and the Transports, all finished down for the day. Technically, the SPY and Industrials keep being very close to their last recorded highs, so nothing has changed.

The Transports violated today the last significant low (which was the lows made on 07/25/2012 at 4934,00). Today the transports closed at 4910.85. However, such violation of a significant low was not confirmed by the Industrials or the SPY. A basic tenet of the Dow Theory is that a movement unconfirmed by other index is meaningless.

Therefore, under Dow Theory, the primary bull market continues in force until a primary bear market signal is given. Since the SPY and the Industrials are still very far from their significant lows (which are the last bear market lows made on June 4), it seems unlikely that any such confirmation will be given. In other words, in spite of all the noise that you are likely to hear in the media and internet, the primary bull market continues in good health.

If the weakness of the Transports scares you, maybe you should read what I wrote yesterday about the “normal” weakness of the Transports at the onset of primary bull markets. You can find it here    

However, the new lows made by the Transports may be hinting that the long-awaited correction might be coming.

Today’s volume was higher than yesterday’s and, since it was a down day, we have to infer that volume was bearish.  Furthermore, today volume has huge when compared with the volume we saw in the last 2 weeks. Normally, such volume explosions confirm the direction of the market (namely, if it is a down day, it makes such down day significant and harbinger of more down days). So, little by little, the bullish patter of volume that we saw until yesterday is being eroded. If volume readings continue to deteriorate, we would have an additional piece of evidence as to an impending secondary reaction. However, it is still too true to tell. Furthermore, don’t forget that, under Dow Theory, volume is always of secondary importance. Price action takes precedence.

Here you have a chart with the updated patter of volume. The blue arrows denote bullish volume (which may occur in a down day when volume is smaller than that of the preceding day), the red arrows display bearish volume (which may occur in an up day when volume is smaller than that of the preceding day).

Bearish volume today. However, pattern of volume until today was bullish short term

 

As to the precious metals universe, GLD closed slightly up, SLV slightly down and their miners (GDX and SIL) both up. Gold has made higher highs whereas silver is barely below the highest high recorded two days ago. All in all, the precious metals universe looks much stronger than the stock market.

Bottom line: The Transports and volume might be suggesting that a secondary reaction might be in the making for the stock market. No such clear hints are being given in the precious metals universe. Let’s sit and wait. Don't forget that as followers of the Dow Theory, we are supposed to invest along with the primary trend. Thus, we shouldn't get too obsesed with the secondary trend.

Below you can find the relevant figures for today

 

DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/04/2012	128,1
Bull market signaled		06/29/2012	136,1
Last close		09/21/2012	145,86
Current stop level: Bear mkt low			128,1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7,17%	13,86%	6,25%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149,46
Bull market signaled		08/22/2012	160,54
Last close		09/21/2012	171,96
Current stop level: Bear mkt low			149,46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7,11%	15,05%	7,41%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25,63
Bull market signaled		08/22/2012	28,92
Last close		09/21/2012	33,48
Current stop level: Bear mkt low			25,63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
15,77%	30,63%	12,84%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17,08
Bull market signaled		09/04/2012	21,83
Last close		09/21/2012	25,26
Current stop level: Bear mkt low			17,08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
15,71%	47,89%	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
Last close		09/21/2012	54,8
Current stop level: Bear mkt low			39,56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14,72%	38,52%	20,75%

Sincerely,

The Dow Theorist.