Monday, October 15, 2012

Dow Theory update for Oct 15: No secondary reaction in gold and silver…yet

Stocks up today. No changes under Dow Theory.

Let’s get started with our Dow Theory analysis for today in this blog.

The three stock indices we monitor, namely the SPY, Industrials and Transports all closed up for the day. Technically, nothing has changed: the primary trend remains bullish and the secondary trend remains bearish. The Transports continue to display more relative strength. If I had to draw a line in the sand, I’d say that 09/28/2012 is the boundary between weak and strong Transports. Furthermore, the Transports exceeded today the previous 10/08/2012 highs. Under Dow Theory such penetration, unconfirmed by other indices has no implications for the broad stock market; however, it clearly shows that my warnings about strengthening Transports which I have been making in “real time” for the last few days were not so misguided after all.

Here you have a chart that spans from Sept 25 to date. The Transports are in the middle of the chart (blue). On top the Industrials (green) and at the bottom, the SPY (yellow). You can see that since Sep 28, when the Transports made an unconfirmed new low, strength prevailed. Such non-confirmation provided a clue as to (at least short term) bottoming Transports.
Since Sept 28 the Transports have been leaders in strength

Volume was clearly bullish. We had a clearly “up” day and today’s volume was stronger than yesterday’s. The overall picture of volume is bullish long term (since its action is typical of a secondary reaction which confirms the primary trend).

As to gold and silver we are on the verge of entering a secondary reaction. Gold has receded 3.12 % since the last jointly recorded highs of Oct 4 and silver 7.16 %. According to the Dow Theory when applied to stocks, the minimum meaningful movement is 3%. Any movement not reaching 3% (except when breaking a “line”) is to be disregarded. When I apply Dow Theory to other markets, I conduct a volatility adjustment. Given that silver roughly doubles the SPY daily volatility, I demand 6% for any movement to be considered relevant.

On the other hand, the gold market displays a daily volatility similar to that of the stock market; hence I will also demand a 3% movement in the gold market for the movement to be considered meaningful.

So as far as the amount corrected is concerned, we could say that gold and silver have officially entered into a correction since:

1)  Technical requirement fulfilled: last minor lows of 09/26/2012 have been jointly broken by the two metals.

2)  Extent requirement fulfilled: Gold has had a down movement exceeding 3% and silver 6%.

However, the time requirement has not been fulfilled. In normal circumstances, the Dow Theory requires the downward movement to span at least 10 trading days. However, we know from this post that both gold and silver made new highs on Oct 4. Hence any secondary reaction movement is to be counted from this date. From Oct 4 (this day is not counted) we have had 7 days of downward movement, not enough to qualify as a secondary reaction.

So patience is required.

So what’s my assessment: According to the Dow Theory, the violation of the minor 09/26/2012 lows is to be regarded as short term bearish. I might say that this turns the tertiary trend (which is totally unimportant to us, since we cannot trade it or even use it or abuse it) has turned bearish. I said “use” it, because we don’t trade secondary reactions either, but we avail ourselves of them in order to set our stops. So in a distinct, non-trading, way we “use” them. More on how we use them in my 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.

However, as of this writing, both the primary and secondary trend of gold and silver remains bullish.

As to the gold and silver miners ETFs, GDX managed to violate the latest significant lows of 09/26/2012 whereas SIL did not. Again, a non-confirmation. So, I must conclude that no secondary reaction has been signaled yet.

I’d like to make a nuance. We have to distinguish between “signaling” a secondary reaction and the “start” of a secondary reaction. When a secondary reaction is “signaled” (i.e after 10 days of downward movement), the Dow Theory is not telling us that the secondary reaction is born after these 10 trading days. What the Dow Theory is telling us is that all the downward movement since 10 days ago was already a secondary reaction, but he have first recognized it the day the signal was flashed. In Dow Theory as with any trend following system, it is impossible to detect in real time, with no lag, the onset of a new trend, be it of primary or secondary nature. However, the Dow Theory’s lag is one of the most acceptable if we compare it with moving averages. The Dow Theory is more reactive. More on this will come in a future post.

So this is all for today.

Here you have the numbers of the markets I monitor.


Data for October 15, 2012


Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
10/15/2012 144.08
Current stop level: Bear mkt low

Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

5.86% 12.47% 6.25%


Bull market started 05/16/2012 149.46
Bull market signaled 08/22/2012 160.54
Last close
10/15/2012 168.35
Current stop level: Bear mkt low

Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

4.86% 12.64% 7.41%


Bull market started 06/28/2012 25.63
Bull market signaled 08/22/2012 28.92
Last close
10/15/2012 31.66
Current stop level: Bear mkt low

Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

9.47% 23.53% 12.84%


Bull market started 07/24/2012 17.08
Bull market signaled 09/04/2012 21.83
Last close
10/15/2012 24.31
Current stop level: Bear mkt low

Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

11.36% 42.33% 27.81%


Bull market started 05/16/2012 39.56
Bull market signaled 09/04/2012 47.77
Last close
10/15/2012 51.64
Current stop level: Bear mkt low

Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

8.10% 30.54% 20.75%


The Dow Theorist. 

Disclaimer: Dow Theory Investment and its author is not a financial adviser. Dow Theory Investment and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of the footer of this blog.


  1. how can you tell when the end of the secondary reaction has occurred or is about to occur? is there a certain "signal" to look for?

    1. Hi kolpin,

      go and read this post: