Friday, October 19, 2012

Dow Theory Update for Oct 19: Happy anniversary 25 years of the 1987 Crash

 Markets celebrate black Monday by mostly going down.

Gold and silver: secondary trend turns bearish.

Later today or early tomorrow I will post in this Dow Theory blog a special issue on the 1987 stock market crash. Would the Dow Theory have kept us safe on October 19, 1987? I’ll give you the answer in a few hours.

The three markets we monitor, the Industrials, Transports and S&P (through its proxy SPY) fell in unison today. Technically, nothing changed. We remain in a primary trend, and the secondary trend remains bearish.

Today volume was bearish, since the stock market closed down and volume was higher than yesterday’s. Thus, we have had two bearish days in a row. I am deriving some interesting conclusions from volume patterns. I want to see Monday’s action in order to reach more solid conclusions.

Gold and silver both were down today. And here is the big news: A secondary reaction signal has been flashed today. 11 trading days have elapsed since the October 4th highs jointly made by gold and silver. The decline has exceeded the minimum threshold of  3% in gold and 6% in silver. Why such percentages? Go and read this post for a full explanation.

To sum up, I now declare that gold and silver are in a secondary reaction because

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%.

3)  Time requirement fulfilled: Since the Oct 4 highs, 11 trading days have elapsed, thus exceeding the minimum time requirement under Dow Theory to qualify a pullback as an official secondary reaction.
Now things get really interesting. Is this the second chance given to gold and silver would-be investors to  enter belatedly the market? Those latecomers sitting on the sidelines should read my post in this Dow Theory Investment blog called “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

For the time being I would wait, as gold has only retraced 3.97% from the October 4th highs. I’d wait for a 6% retracement in gold and at least a 10% retracement in silver. I’ll write more about this in the coming days. Again, to understand why I say this, go and read this post.

Then you will understand why I don’t advise to jump the gun right now.

As to the gold and silver miners, SIL closed down and GDX, closed up!! Furthermore, SIL and GDX refused to break prior lows. So in the precious metals' miners universe no secondary reaction has been announced.

Here you have the figures for today of the markets I monitor.


Data for October 19, 2012


Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close

Current stop level: Bear mkt low

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

5.30% 11.88% 6.25%


Bull market started 05/16/2012 149.46
Bull market signaled 08/22/2012 160.54
Last close

Current stop level: Bear mkt low

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

4.01% 11.72% 7.41%


Bull market started 06/28/2012 25.63
Bull market signaled 08/22/2012 28.92
Last close

Current stop level: Bear mkt low

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

7.50% 21.30% 12.84%


Bull market started 07/24/2012 17.08
Bull market signaled 09/04/2012 21.83
Last close

Current stop level: Bear mkt low

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

12.09% 43.27% 27.81%


Bull market started 05/16/2012 39.56
Bull market signaled 09/04/2012 47.77
Last close

Current stop level: Bear mkt low

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

8.29% 30.76% 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. can you touch upon what possible conclusions one could make from the bearish volume pattern?

    btw, reading your articles and analysis is especially useful on stomach churning days like today!

  2. Hi Kolpin,

    Good to be your alca seltzer...:=)

    I need to see Monday's action, really. I don't want to jump the gun now. Furthermore, it is unimportant to us, concerned only with the primary trend. Depending on Monday's action and its volume, I will derive clues as to whether the secondary reaction is in its death-throes or has still some more days to go. But this is merely "technical gossiping." We use and "abuse" secondary reactions. We don't trade them, and hence we just have to be reactive and not proactive with them.

    You have to bear in mind that 70% of primary bull market signals end up in profits. So the odds are in our favor. And if the sky falls, the max pot loss for the SPY lies at a very meager 6.25%. So we would keep powder dry. This is what really matters.

    I will sleep very well tonight. Really. I hope you too.

    Have a nice weekend.


  3. haha, I do love gossip. seems like if Monday's volume is high and the direction is bearish, then the secondary could still continue. I spent a good deal of dry powder today, so if there's anything that keeps me up at night tonight, it's wishing I had more left to use next week! thx again!

    1. Right. This would be bearish short term. But bear in mind that volume merely qualifies trends, doesn't make them. Price action in itself is king.

      Also bear in mind:

      1) during the last rally (the one that finished two days ago) volume was increasing every day: bullish short term.

      2) volume expanded in the last primary bull swing: bullish longer term (confirms the primary trend).

      3) A volume surge next Monday with lower prices while bearish short term, might be the last volume climax which tends to signal the end of secondary reactions. This is why I really need to see price actions and volume and also keep an eye on other markets that are influenced by liquidity.


  4. Does Relative Strength Index figure into your evaluations? I notice that SIL has had a decreasing RSI, which would be bearish, even if only short term. Thanks.

  5. Hi Gordon,

    I am aware of RSI for short-term trading (i.e 1-5 days)coupled with Dow Theory as a primary trend filter. However, my experience with RSI when applied to secondary reactions was not positive. Furthermore, I am very adamant when it comes to indicators that are "length-based". Thus, the RSI, like stochastics, moving averages, etc. has a definite look-back period. Of course, one can tweak it. But I feel that they lack responsiveness. Dow Theory by not depending on "look-back" periods is really the closest thing we can get to an indicator without lag. It has a lag, but it is much more responsive than, i.e. moving averages.

    Furthermore, as I wrote to Kolpin (see commentary above), we shouldn't get too obsessed with secondary reactions. We align ourselves with the primary trend and with just need to recognize secondary reactions once they finished in order to adjust our trailing stops. We are not in the business of trading them, we just "use" them.

    However, what I use often is relative strength charts. Thus, if we plot SIL and GDX, I see that the SIL/GDX ratio is clearly bullish not showing signs of reversing. This has an overall long term bullish implication. If you plot the ratio of SLV/GDX you will see that in tune with the secondary reaction the ratio is now correcting (heading lower). Silver typically loses more than gold when the going gets tough. But such charts don't depend on any look-back period.