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
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		10/04/2012	146.13
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.37%	14.07%	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		10/04/2012	173.61
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
8.14%	16.16%	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		10/04/2012	33.9
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
17.22%	32.27%	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		10/04/2012	25.57
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
17.13%	49.71%	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		10/04/2012	54.25
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
13.56%	37.13%	20.75%

Sincerely,

The Dow Theorist