Dow Theory Update for Dec 21: Stocks down. No change in trends

Precious metals mixed.

Let’s get started with our Dow Theory comment.

The SPY, Industrials and Transports closed down. For a third day in a row, neither the Industrials nor the SPY deigned to confirm the breakout made by the Transports on Dec 18. Such lack of confirmation is troubling, and the longer it persists, the more likely the ongoing bear market will continue. As I have written here.

Rhea wrote that the principle of confirmation becomes more important the longer the time frame. In other words, a primary bull market signal is meaningless without confirmation. The same basically applies to secondary reactions. However, when it comes to rallies (or small pullbacks in bear markets) which I would label “tertiary movement," some Dow Theorists are lukewarm with the principle of confirmation.

Thus, it is vital that the Transports’ breakout of December 18 be confirmed by either the Industrials or the SPY for a new primary bull market to be signaled. In the absence of a primary bull market signal, we have to conclude that the primary trend remains bearish as per the signal of 11/16/2012 and that the current rally is merely a secondary reaction against the primary bearish trend.

Volume today was huge. Given that it was a clear down day, it has a bearish implication. I’d label the overall pattern of volume as neutral. Such huge volume, as you can see in the chart below, is very likely to have two opposite, yet extreme, outcomes. Either we have seen a climax which exhausted the downward movement or this monster volume signals a new downward movement of significance. If you look at the chart, you can see that the preceding monster volume day heralded relentless lower prices in the coming weeks. 

Today's volume marks a relevant point in the chart.

Gold (GLD) was slightly up. Silver closed unchanged. Even though my stomach rebels at the Dow Theory verdict, I must insist that the primary trend is bearish as per the Dec 20 signal. I am aware of the manipulation thesis. However, manipulated markets can go up or down due precisely to such manipulation and, hence, result in losses for those not willing to heed the market's warnings. This implies that lower prices are likely in the next weeks and months ahead. Of course, this can be a failed signal. Nevertheless, we are not in the business of getting all trades right but merely protecting capital by setting technically effective stop losses and letting profits run until the trend reverses by using trailing stops determined according to the Dow Theory. More about the important skill of setting stops in my post in this Dow Theory blog “Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stop” which you can find here.

Therefore, the primary trend is bearish as well as the secondary trend.

As to SIL and GDX (the gold and silver miners ETFs), SIL closed down and GDX closed up. No change in trends. The primary trend is bullish and the secondary bearish.

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

Data for December 21, 2012
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bear market started		09/14/2012	147,24
Bear market signaled		11/16/2012	136,37
Last close		12/21/2012	142,79
Current stop level: Bull market high			147,24
Price chg since bear mkt signaled	Tot decline since start bear mkt	Max Pot Loss %
4,71%	-3,02%	-7,38%
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		12/21/2012	160,33
Current stop level: Sec React low		11/02/2012	162,6
Realized Loss %	Tot advance since start bull mkt
-0,13%	7,27%
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		12/21/2012	29
Current stop level: Sec React low		11/02/2012	29,95
Realized gain %	Tot advance since start bull mkt
0,28%	13,15%
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		12/21/2012	22,24
Current stop level: Bear mkt low			17,08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
1,88%	30,21%	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		12/21/2012	45,18
Current stop level: Bear mkt low			39,56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
-5,42%	14,21%	20,75%

Sincerely,

The Dow Theorist