Wednesday, November 14, 2012

Dow Theory Update for Nov 14: The last gasp of a bull market?

Transports fail to violate its 09/28/2012 lows but may do it very soon.

Let’s begin with our Dow Theory commentary for today in this blog.

The SPY, Industrials and Transports closed strongly down. The Transports almost violated its 09/28/2012 lows, but failed to do so. Today’s close for the Transports was 4926.12 whereas the secondary reaction lows to be violated stand at 4892.62.

Volume was higher than yesterday's, which makes it a bearish volume day. Now unambiguously the pattern of volume is bearish short term. However, again, I didn’t see a climax.

So tomorrow may be the moment of truth. If the Transports finally close below 4892.62 a new primary bear market will be signaled. Thus, all readers of this Dow Theory blog should keep an attentive eye to the Transports, since a primary bear market signal implies the need to get out of stocks as soon as possible.

Curiously enough, such alleged bad news may be good news for latecomers who missed the primary bull market signal on June 29. Today, the SPY by closing at 135.93 erased all the unrealized gains made since June 29 (date when a primary bull market signal was signaled). While this is certainly not good news for those that bought on a timely manner, it is the second chance for latecomers to get aboard at the same price and with the benefit of doing it four months later.

If you are a regular reader of this Dow Theory blog, you know that I never advise to chase markets. If the investor is too late for a timely entry, it is better to pass the trade or wait for a belated opportunity to show up. This is why in September, I wrote the 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 may read here.

However, right now there is a good opportunity for latecomers to enter the stock market.

On the one hand, as I wrote above, the SPY is at a price level that even betters the entry price of June 29.

On the other hand, and more importantly, risk is very limited in case things go wrong.


Because, if things go wrong it is very likely that tomorrow or the day after tomorrow the Transports will violate their 09/28/2012 thereby flashing a primary bear market signal. If such primary bear market signal is signaled, then the investor should immediately exit his/her position. In other words, risk is very limited because now we have an ultra narrow stop (namely the distance between today’s Transports close and its 09/28/2012 lows) while the upside, in case the Transports refuse to go down, continues to be high. It isn’t uncommon for bull markets to witness gains of 40%. While this may look laughable right now, one thing is clear: It either is a new bear market, or it is a bull market. There is no third way. If it is a bear market, fasten your seatbelts. If it is a bull market, then the odds favor a solid price advance. The research made by Schannep concerning price gains in bull markets is worth careful study by the investor and it is certainly reassuring when trying to gauge the likely reward of a trade alongside the primary trend. You can fin Schannep’s master piece here

Personally, I think that the odds favor a primary bear market signal. However, when I think of a risk of maybe 2% (the price decline likely to be suffered in case tomorrow the market will close down, and a primary bear market signal is flashed) versus a likely of 30 or 40%, I realize that there is a magnificent risk reward ratio. In any instance, if the trade goes sour, it will be a short-lived  trade. Buy at the open and very likely sell with a small loss at the close.

If one wants to exactly know the measure of his/her risk, then a position in the Transports is advised. Furthermore, and spite of today’s rout, the Transports have been the strongest index since September 28.

Charles Dow advocated the acquisition of stocks in the depths of secondary reactions with a tight stop under the acquisition price under the premise that in most instances, the primary trend finishes by reasserting itself. While now I am aware that it takes strong guts to do it, one thing is clear: The harder it looks to do it, the better the risk-reward  ratio.

Of course, each investor must do his/her home works, analyze his/her pain tolerance and take the final decision. This Dow Theory blog just opens avenues for thinking.

Gold and silver closed up. Remember that we must keep an eye on the 11/02/2012 lows. If they are violated, a primary bear market will be signaled for gold and silver. In the meantime, the primary trend remains bullish and the secondary trend remains bearish.

True to the signaling of a secondary reaction in SIL and GDX, today both ETFs collapsed. The secondary reaction must run its course. The primary trend remains, nonetheless, bullish.

The action of the miners ETFs seems to suggest that all stocks were dumped today. I say this because gold and silver closed up.

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


Data for November 14, 2012


Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
11/14/2012 135.93
Current stop level: Bear mkt low


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

-0.12% 6.11% 6.25%


Bull market started 05/16/2012 149.46
Bull market signaled 08/22/2012 160.54
Last close
11/14/2012 167.14
Current stop level: Bear mkt low


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

4.11% 11.83% 7.41%


Bull market started 06/28/2012 25.63
Bull market signaled 08/22/2012 28.92
Last close
11/14/2012 31.64
Current stop level: Bear mkt low


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

9.41% 23.45% 12.84%


Bull market started 07/24/2012 17.08
Bull market signaled 09/04/2012 21.83
Last close
11/14/2012 22.46
Current stop level: Bear mkt low


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

2.89% 31.50% 27.81%


Bull market started 05/16/2012 39.56
Bull market signaled 09/04/2012 47.77
Last close
11/14/2012 47.22
Current stop level: Bear mkt low


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

-1.15% 19.36% 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. 

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