Dow Theory Update for Oct 17: Primary trend for stocks bullish. Secondary trend still bearish

Primary and secondary trend bullish in the precious metals universe.

 

Richard Russell, of the „Dow Theory Letters“, seems to little by little join the bullish camp, albeit in a hedged manner. In his yesterday’s letter, he acknowledged that the bull seems to be winning the battle. As I wrote in the past in this Dow Theory blog, the great thing of Russell is his flexibility. He doesn’t last too long on the wrong side when market action proves him wrong. He’s got the humility and flexibility that distinguish long-term survivors. There is nothing wrong in being wrong, but in staying wrong.

We have to take into account that the Dow Theory is not an exact science. I liken the Dow Theory to the practicing of laws. While the laws are the same for every practitioner, their application differs substantially depending on the lawyer applying them. Thus, our main task is not to be always right but to minimize losses when being wrong. Furthermore, there are market junctures when, even with the most accurate interpretation, market action produces market losses for the investor. This is why only 70% of the Dow Theory signals result in gains for the investor. But 70% is fully OK. Furthermore, the average percentage gain when winning is much higher than the percentage loss when losing. In trading parlance, we would say that the Dow Theory has a very high profit  factor which is always a very good thing. More on this in a future post.

The three indices we monitor, the Industrials, Transports and the SPY closed up for the day. However, technically we cannot say that the secondary correction is finished. I quote what I wrote yesterday in this Dow Theory blog, which remains fully applicable:

“Even though I feel that it is likely that the secondary reaction may have finished, as with primary trends, it is impossible to know in real time when the secondary reaction has finished. We just can make guesses, as I have just done right now based on volume, non confirmations, etc. We will only know for sure that it is finished when the last recorded highs of 10/05/2012 (DIA) and 09/14/2012 (SPY and Transports) are penetrated. However, there is nothing wrong with that, since we don’t trade them.”

Attention Transports and latecomers

I wrote in this Dow Theory blog that for those latecomers waiting for a good opportunity to enter the market the Transports might be a good (and maybe last) opportunity to do it with a good risk reward ratio.

The Transports are very close to penetrate their 09/14/2012 high. If we get a close above this level this is the last chance to get aboard.

So latecomers should intently monitor the Transports in the next few days.

Please do your due diligence and re-read this vital 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:

 
 

Volume was again, for the fifth day in a row bullish. We had a clearly up day on stronger volume. Curiously, such display of volume bullishness tends to beget a one or two days reversal to be further continued by more ascending prices. What it is clear is that the Dow Theory is not interested in forecasting 1 or 2 days movements. Hence, what it is more important is to realize that volume is becoming bullish short term.

Related to volume or its underlying quality is a stock’s short interest. Today Bespoke Investment Group posted an interesting study in Seeking Alpha that demonstrated that the recent rally is not caused by short covering but by genuine buying. You can read the whole article called What's Driving This Bounce?  here           

As to the precious metals' universe, no changes. GLD, SLV, GDX and SIL all closed mildly up for the day.

Conclusions:

1.      Stocks: It is still premature to declare the secondary reaction finished. The primary trend remains solidly bullish. The Transports are very close to offer the last chance to join the primary bull market for those latecomers.

2.      Precious metals: No changes in the trenches. Primary and secondary trend remains bullish.

Here you have the latest numbers of the crucial markets I monitor:

 

Data for October 17, 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		10/17/2012	146.2
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.42%	14.13%	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		10/17/2012	169.54
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
5.61%	13.44%	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		10/17/2012	32.11
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
11.03%	25.28%	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		10/17/2012	25
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.52%	46.37%	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		10/17/2012	53.11
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
11.18%	34.25%	20.75%

Sincerely,

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.