Dow Theory update for October 1: Markets up. No technical changes...yet

A secondary correction may happen any time now

On Friday, Sept 28, the stock market had been trending lower for the last 10 trading days (for the SPY and Transports). This is the minimum time requirement for a secondary reaction to exist.

However, for a secondary reaction to exist it is necessary that two of the three indices we monitor retrace at least 3% from their previous highs. In addition to the 3% retracement requirement, and while not carved in stone, it is advisable that 1/3 to 2/3 of the previous price advance be retraced.

If we look at last Friday’s Sep 29 closing prices we can see that only the Transports had experienced a retracement exceeding 3%, namely -6.19%, whereas the SPY and the transports didn’t reach the 3% threshold. Thus, under Dow Theory, although the time requirement for a secondary reaction was fulfilled, the 3% retracement in at least two indices was not met. Furthermore, the SPY only retraced 17% of the previous up leg (the upward movement from the bear market lows of June 4 to the highest high of Sep 14) which doesn’t qualify as a secondary reaction either. Same story applies to the Industrials. Well, by the Industrials we haven't even had 10 day trading day correction since the last highs were made on Sept 20.

Today’s market action hasn’t changed the picture we had last Friday at all, since the three stock indices closed up for the day, thereby making the retracement even smaller.

All in all, the Transports alone are in “secondary correction” mood. But under Dow Theory such movement unconfirmed by at least one of the other two indices is meaningless and even deceptive. I marked the word “deceptive” because the weaker Transports have many analysts confused and have them proclaim that no bull market exists.

If you still doubt about the existence of a primary bull market in stocks, you should read my post “5 Reasons why I consider the stock market in a primary bull market” which you can read here

All in all, the time requirement for a secondary reaction to exist has been met. However, this is not enough to proclaim the “advent” of a secondary reaction under Dow Theory. We have to see  in at least two indices a downward movement of at least 3%. Until this happens we cannot talk of a secondary reaction. However, it is clear that from now on I’ve to intently observe this market.

Tomorrow I will post an updated chart of the three indices where you will be able to visualize the yet to exist secondary reaction. Furthermore, I will provide you with all the relevant figures in order to appraise secondary corrections.

Today we had again a bearish volume day. The stock market closed up on lower volume. In the last 7 days, we have had 5 bearish volume days. Is this suggesting the eventually we will get the awaited secondary reaction? We will see. On the very short term I see in the charts that we have had 4 consecutive down days. According to legendary trader Victor Sperandeo this pattern suggests that the short term trend is nearing its end. I hope this time this pattern fails and that the bearish volume indications prevail, since, as followers of this blog know, I am eagerly awaiting a secondary reaction. More on this here and here.

Volume is bearish short term.

 

Gold, silver and their miners all closed up for the day. Gold and silver briefly broke out their respective highs but after staging an outside reversal day closed near the day’s lows. Such outside reversal days tend to denote short term tops. However, again, don’t get lost with the technical babble which I myself sometimes cannot avoid. Your focus is the primary trend. And this is solidly bullish for gold, silver and their miners. This should suffice to make of you a very successful investor.

Here are the figures of the markets I monitor for today:

 

Data for October 1, 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		10/01/2012	144.35
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
6.06%	12.69%	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		10/01/2012	172.29
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.32%	15.27%	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		10/01/2012	33.65
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
16.36%	31.29%	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		10/01/2012	25.05
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.75%	46.66%	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		10/01/2012	53.92
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
12.87%	36.30%	20.75%

Sincerely,

The Dow Theorist