Thursday, October 4, 2012

Dow Theory Update for Oct 4: Very bullish day. Important market action

Secondary reaction in gold and silver definitely avoided.

Under Dow Theory today it was a relevant day because market action has clearly aborted the incipient secondary reaction in the gold and silver markets. More on this below.

Today was a clearly bullish day. All the markets we monitor closed up for the day.

The Industrials and the SPY remain, nevertheless, inside the “line” whose description I gave in my post “Stock markets forming a „line“: What does it mean under Dow Theory?” which you can find here

As to the transports, I feel that Schannep, once again, is going to be vindicated by sheer market action. The moribund Transports maybe were not so moribund after all, since in the last five days have displayed greater relative strength than the SPY and Industrials. The greater relative strength is apparent if we plot a 10 minute bar chart spanning the last five days. If you look at the chart below you will see that since 09/28/2012 the Transports refused to decline when the SPY and Industrials were falling. Furthermore, the Transports have closed today near the highs of the day and breaking out the highs of the last four preceding days.

Of course, if the Transports begin to display some strength our long awaited secondary reaction may fail to materialize. Here you have the 10 minutes chart of the last five days. The Transports are displayed in blue.

Transports (in blue) are becoming stronger

Today volume was bullish as we had an up day with stronger volume. So little by little the pattern of volume seems to be bettering short term. Is going to be averted the secondary reaction?

As to gold, silver and their miners, it was quite a bullish day.

Gold, Silver and Silver miners ETF made new highs for the move. As to gold and silver under Dow Theory this is clearly a bullish sign. We are, as per Dow Theory parlance, “in the clear” and it reaffirms the primary bullish trend. Hence, I am sorry for those latecomers that were expecting a secondary reaction as the last chance to get “in”. The gold and silver market finally didn’t deign to offer them a secondary reaction. If you don’t understand what I mean, you should read 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

Furthermore, for those already “in” this is bad news, since we cannot move higher our trailing stop. Hence, we must keep the old stops which remain fixed at the bear market lows of 05/16/2012 (gold) and 06/28/2012 (silver). Look at the numbers below for more details. Of course, one might be tempted to raise the stop. However, such stop would be technically ungrounded and prone to being run. If all this talk about stops sounds queer to you, maybe you should read this post “Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stop” which you can read here 

Of course, a secondary reaction may develop every moment now. But one thing is clear after today’s market action. We have to set the “clock” at zero again. We have to reset it in order to appraise a new secondary correction. Absolute new highs for the movement imply that both the primary but also the secondary trend are solidly bullish and the small pullbacks we had which didn’t even reach the stage of a secondary reaction have been suddenly aborted. Nada, finito.

It goes without saying this is very bullish action and if I had to guess I think gold and silver are providing clues as to the likely breakout of the line inside which the SPY and Industrials are trading now. Furthermore, the recent Transports strength seems to favor an upside breakout. Please be advised that this is not good news, since we need a correction to raise our stops. But the market is not forthcoming.

Regarding the miners, SIL made a higher high “in the clear” while GDX failed to confirm. Lack of confirmation may negate the high made by SIL, although one day is not enough for a lack of confirmation to be significant. So we have to wait a little bit.

Again, and amidst pervasive bearishness, the way I read the market with the help of the Dow Theory shows me that the upside has better odds than the downside. Both for the primary trend and the secondary trend. Perhaps you begin to see now the importance of understanding Dow Theory: It helps you ignore the “noise” and focus on the market action.

A post in the great “Big Picture Blog” shows clearly the degree of pessimism surrounding professional investors. Bearishness is deeply entrenched and normally tends to be a contrary indicator. Here you have the relevant article: “Sell Side Indicator Still Shows Extreme Bearishness” which you can read clicking here

And here are the figures for today:


Data for October 4, 2012


Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
10/04/2012 146.13
Current stop level: Bear mkt low

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

7.37% 14.07% 6.25%


Bull market started 05/16/2012 149.46
Bull market signaled 08/22/2012 160.54
Last close
10/04/2012 173.61
Current stop level: Bear mkt low

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

8.14% 16.16% 7.41%


Bull market started 06/28/2012 25.63
Bull market signaled 08/22/2012 28.92
Last close
10/04/2012 33.9
Current stop level: Bear mkt low

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

17.22% 32.27% 12.84%


Bull market started 07/24/2012 17.08
Bull market signaled 09/04/2012 21.83
Last close
10/04/2012 25.57
Current stop level: Bear mkt low

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

17.13% 49.71% 27.81%


Bull market started 05/16/2012 39.56
Bull market signaled 09/04/2012 47.77
Last close
10/04/2012 54.25
Current stop level: Bear mkt low

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

13.56% 37.13% 20.75%

The Dow Theorist


  1. This may be a silly question (I've only just ordered one of the dow theory books you recommended and am still waiting for it to arrive), so please excuse me:

    if you are setting the clock back to "zero", does that mean the secondary reaction isn't likely to develop for another 3 months? That would seem to imply this is a good time to "get in" - am I misinterpreting something?

    1. Thx for visiting my blog. I did not express myself well. You know that for a secondary reaction to exist we need at least ten days of overall downward movement (pullback). Gold and silver after making new highs have "killed" the incipient pullback we were having, so the secondary reaction didn't finally develop. Being now at "highest highs" (for the primary move), if the market goes down, i.e. five days, the new down movement cannot be added to the "light" one we had until yesterday. The clock must be reset to zero. So now, if the market starts to go down again, which is a distinct possibility, BTW, we have to start counting the necessary days for considering a secondary reaction from day "zero."

      However, I insist a pullback may happen any time now. Furthermore, experience shows that being at highest highs the market shows "discontinuity." It has roughly 80% likelihood of pulling back and 20% of shooting to the upside. However, 2 or 3 days of a pullback are not enough to have a secondary reaction. We have to have 10 days of overall downward movement.

      Now it is not the best moment to jump aboard, since the risk-reward ratio at this juncture is quite poor for those with a time investment horizon not exceeding 1-2 years. To learn more about this maybe you find of your interest the following post.

      and the links pertaining to this post.

      I'm happy that you bought your first book on Dow Theory. It changed my life as an investor.