Saturday, October 6, 2012

Rearranging the big picture in a week full of relevant Dow Theory events

Weekly Dow Theory recap


 This was a week rich in Dow Theory significant events as well plain technical ones. 


 Here is a summary of the messages the markets gave us this week of which this blog took due notice.

1)     Bonds are at a critical juncture. If they turn weaker, they  may ignite gold.

This is the most important market to monitor right now.

2)     Stocks are forming a “line." Lines denote accumulation or distribution. On Friday Oct 5, the Industrials broke out, but it was not confirmed by the SPY. So no conclusions may be derived yet.

3)     Volume continues mixed short term. However, long term the pattern of volume is bullish.

4)     Stocks have refused to enter a secondary reaction. Here you have how I try to appraise the existence of a secondary reaction in real time: 

5)     Furthermore, an in spite of all the naysayers, the Transports began to display strength last week. If this trend continues, it will further affirm the primary bull market in stocks. This is a significant fact that, as far as I know, nobody has noticed it yet. Here you have the relevant chart and more in depth commentaries. 

6)     Professional investors continue very bearish. This is usually a contrary indicator and is long term bullish. More on this here (the great Ritholtz’s blog)

7)     Gold and silver had a very bullish breakout last Thursday Oct 4. Such breakout confirms both the primary and secondary trend as bullish. All hopes for a secondary reaction to develop have been shattered.

8)     Silver miners also had a bullish breakout unconfirmed, however, by gold miners. Such lack of confirmation, if it persists may be hinting at a secondary reaction in the miners. If it is confirmed soon (let’s say next week), then it will have very bullish implications as it will provide independent confirmation of the gold and silver break out.

9)     Silver stocks continue strong, very strong. This is giving us a message that can be applied to other markets (i.e. stocks).

Conclusions : The fact that a secondary reaction has been negated in gold and silver display a bullish message whose ripples will be felt in other markets as well. Furthermore, greater relative strength of both silver and its miners versus gold and GDX shows that as of this writing the “risk off” mentality continues entrenched. Thus, my overall stance on the PMs universe continues bullish long term (1-2 years) and even short term (three months) in spite of an occasional pullback that may occur.

As to stocks, this week has provided more hints that it wants to go higher long term rather than lower. A secondary reaction hasn’t developed yet. The Transports are becoming stronger, and the “line” was broken on the upside by the Industrials. If the SPY confirms next week, the primary bull signal will be confirmed and the secondary movement will be unambiguously bullish.

Definitely, these are not markets to be short.

Enjoy the weekend.


The Dow Theorist

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