Dow Theory Update for Feb 27: Industrials make higher highs unconfirmed

 Lack of confirmation should not persist too long

Special note on gold

Jon Strebbler, Richard Russell’s new associate, is turning bullish on gold. He is of the opinion that is likely that a bottom has been made. I also think so, not so much because of the charts but because of the “puke” indicator. I order to become “technically” bullish on precious metals I need to see a primary bull market signal.

 

One off topic: Richard Russell’s description of the perfect business encapsulates lots of wisdom. You can find it for free in his Dow Theory Letters website.

 

GLD lost yesterday (Feb 26) 2.41 tonnes of gold. Thus, inventories have been declining for 6 days in a row. All in all, inventories have declined from 1322.97 tons to 1270.44 tonnes, that is 52.53 tonnes or 3.97%.

I have written extensively about the bullishness of such an event (contrary to conventional wisdom), as you can find here and here.

Stocks.

The SPY, Industrials and Transports closed up today. The Industrials made a higher high unconfirmed by the SPY and Transports. Persistent lack of confirmation may be hinting the onset of a secondary reaction. The primary and secondary trend remains bullish.

Here you have an updated chart of the three indices I monitor displaying the lack of confirmation:

Industrials make higher highs unconfirmed by the Transports and SPY

 

Volume receded today as prices advanced, which has a bearish connotation. Thus, today we had the seventh bearish volume day in a row. 

Hence, the four bearish volume readings I aluded to here remain fully valid. In addition to them, we have to closely watch whether the SPY or Transports make new highs, thereby confirming the Industrials. Failure of confirmation would be another “minus”.

Here you have an updated chart depicting volume and price action. Even the untrained eye can see that rallies result in declining volume whereas volume develops activity during pullbacks.

Volume is bearish. Will market action prove volume right?

Gold and silver

Leaving aside the “puke” indicator or the analysis of Jon Strebbler, the fact is that the primary and secondary trend of the market remains bearish. If a bottom has been made, we shouldn’t rush. If a trend of sufficient magnitude develops we will be given ample warning by the Dow Theory, since it is better to miss the first 6-8% up movement and enter a trend with proven odds of survival than to try to call the exact bottom or top.

This is why I separate my musings about gold from market action. Today gold and silver closed down (which was due after 4 days of relentless advance). What happens next will be vital: Will the lows made last week hold or will they be violated? In the meantime, we will wait.

One thing is clear to me: According to the Dow Theory the last four days rally is not enough to qualify as a secondary reaction against the prevailing primary bear market. It does not fulfill the requirements of time (minimum 10 days) and extent (ca. 3% for gold and ca. 6% for silver). Why I require a higher volatility threshold for silver. Go here and you will know why.

SIL and GDX (the silver and gold ETFs) closed down. The primary and secondary trend remains bearish.

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

 

Data for February 27, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.1
Last close		02/27/2013	151.9
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
4.01%	11.95%	7.63%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.5
Bull market signaled		08/22/2012	160.5
Exit December 20		12/20/2012	161.2
Current stop level: Sec React low		11/02/2012	162.6
Realized Loss %	Tot advance since start bull mkt
0.39%	7.83%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Exit December 20		12/20/2012	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
Exit January 23		01/24/2013	21.69
Current stop level: Sec React low		11/15/2012	21.87
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-0.64%	26.99%	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
Exit January 23		01/24/2013	44.56
Current stop level: Sec React low		12/05/2012	45.35
Realized Loss %	Tot advance since start bull mkt	Max Pot Loss %
-6.72%	12.64%	20.75%

Sincerely,

The Dow Theorist.