Dow Theory Update for Oct 10: Secondary trend for stocks turned finally bearish.

The Industrials and the SPY violated the lows of the line.

Markets were made to befuddle as many investors as possible. However, armed with the Dow Theory, we can in most instances avoid being fooled by the markets and be on the right side and, when occasionally wrong, keep our losses contained. 

So what did the stock market today?

Both the SPY and the Industrials closed down for the day.

More importantly, the Industrials and the SPY violated the lows of the “line” I’ve been studying in the last few days here and here

Thus, the SPY closed at 143.28, and the lows of the line were established at 143.29. So by a mere cent, the SPY violated its line lows.

More decisively the Industrials closed at 13344.97 clearly violating the lows of the line established at 13414.51.

Since we have witnessed a joint violation of the lows such a movement has credence under the Dow Theory.

What are the implications of the confirmed breaking of the line?

The implications are clear: The secondary trend of the market has turned unambiguously bearish. Furthermore, now we can re-qualify the all the market action occurred since 09/14/2012 as a secondary reaction. Please mind that I am talking of the secondary trend (from 2 weeks to ca. 8 months). I am not saying that the primary trend has turned bearish.

I will monitor the subsequent developments of the new secondary bearish trend, since future market action is very important in order to:

a)      Raise our stop-loss.

b)     Allow an opportunity for latecomers to enter  the market at a decent risk reward ratio. If this sounds queer to you, please read this post: “What should I do if I missed the Dow Theory bull signals for the SPY and GLD? Dow Theory’s second chance: The first secondary reaction," which you can find here.

Please mind that the Transports closed up for today. Again and for eight days in a row, the Transports are displaying more relative strength.

Speaking about the Transports. In my Oct 8 post “What should I do if I missed the Dow Theory bull signals for the SPY? Dow Theory’s second chance: The Transports” which you can find here

I was suggesting a long position in the Transports for latecomers wishing to participate in the primary bull market in stocks.

Have been I proven wrong? Was ill-timed this piece of advice?

The answer: Tomorrow. 

I want you to think it over. Just a hint: Think about the primary trend and until I give the answer don’t think about selling out.

Here you have an updated chart displaying the breaking of the line:

Under Dow Theory the secondary trend turned bearish. Both the SPY and the Industrials violated the lows of the line

Volume was bearish since it was a down day on stronger volume. In the last 14 trading days, we have had eight days of bearish volume. While this is not conclusive in itself, one thing is clear: Short term volume is not supporting the bullish case. However, when I say “short term," term”, I mean “very short term” (i.e. the next few days). If we look at the longer-term  pattern of volume pre and post secondary reaction (now we can officially call it by its name), we’ll see that the primary bull market swing was on higher volume than the secondary reaction. This is typical the typical volume pattern of primary bull markets: Volume tends to expand with increasing prices and to contract on declines.

Therefore, while being somewhat bearish in the very short term, the pattern of volume conforms to classical Dow Theory and seems to suggest that the breaking of the lines is merely heralding a secondary reaction.

Here you have an updated chart of volume:

Volume: Short term bearish. Long term confirming the primary bull market

 As to gold, silver and their miners, we had a mixed day. Gold closed slightly down. Silver slightly up. Conversely, gold shares closed up and silver shares down. However, no technical damage has been made.

Conclusions: Don’t press the panic button. The market continues in a primary bull market, and a secondary reaction is something to be welcomed as it is healthy (like a summer storm). Markets cannot go up in a straight line. As to gold and silver, we cannot even talk of a secondary reaction. Don’t forget that the action of October 4^th, was very bullish for gold and silver. Remember what I wrote in this post.

And here you have the numbers for today:

  

Data for October 10, 2012
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		10/10/2012	143.28
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
5.28%	11.85%	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		10/10/2012	170.84
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
6.42%	14.30%	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		10/10/2012	32.95
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
13.93%	28.56%	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		10/10/2012	24.34
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
11.50%	42.51%	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		10/10/2012	52.48
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
9.86%	32.66%	20.75%

Sincerely,

The Dow Theorist