Dow Theory update for May 22: Bearish action in both stocks and precious metals

Trends remain unchanged

Richard Russell of the Dow Theory Letters sees no distribution in the stock market.

Readers of this Dow Theory blog know that I observed an improvement in volume readings in the last few days (with today’s exception).

It seems Richard Russell has reached similar conclusions, as in his last two Dow Theory letters, he notes that there are no distribution days in the indices and the averages. As Russell says, “the coast is clear." While this is bullish short and medium term (i.e. next few weeks), such volume bullishness tends to beget a counter trend movement more often than not.

Furthermore, I have learned to distrust even my own volume readings; not because they are wrong but for two reasons: Firstly, because volume merely qualifies price actions. Trends are made by prices not by volume. While it is true that supportive volume increases the odds for trend to continue, the final say lays in price action itself. While this is the subject for a future post in this Dow Theory blog, volume modestly increases the probabilities for a trend to continue. Thus, volume is a positive contribution, albeit of moderate proportions. I’d say that we owe 95% of our investment success to successfully reading price and its resulting trends.

Secondly, because I am interested in the primary trend, not in trading secondary reactions. The Dow Theory record is so outstanding that I will take all primary bull and bear market signals, no (volume) questions asked. Since volume considerations tend to play a more important role in appraising the likelihood for a secondary reaction to start or to run its course, it becomes kind of irrelevant to me. Of course, shorter term traders may find useful volume readings, and I keep an eye on them because, the more I know (even if I don’t use such knowledge), the better).

Stocks

The SPY, Industrials and Transports closed down. The SPY made a clear outside reversal bar. However, one day of bearish action is not enough to change a trend. The primary and secondary trend remains bullish.

Today’s volume was remarkably higher than yesterday’s, which is bearish as declining prices were confirmed by expanding volume. In yesterday’s post, I wrote that “[t]he overall pattern of volume is neutral with a slight bullish bias. I’d like to see the way volume acts in a clearly down day to label finally volume as bullish. In the meantime, I am cautious." Well, this day has arrived: it is today. Huge downward volume tells me that, at best, the pattern of volume remains neutral. Furthermore, today’s huge volume tells me that lower prices in the days ahead are a distinct possibility.

Here you have an updated price and volume chart:

Today's volume was clearly bearish

  

Gold and silver

Gold expert and blogger FOFOA has posted a very interesting article concerning GLD and its vanishing inventory (yes: except for one day, GLD has relentlessly been drained during the last weeks). You can read his latest piece  “Hold on (to this coins and bars)” by clicking here.

GLD and SLV closed down. Until now the outside reversal bar we saw a couple of days ago hasn’t resulted in firming the precious metals. The primary and secondary trend remains bearish.

GDX and SIL, the gold and silver miners ETF closed up. The primary and secondary trend is bearish.

Here you have the figures of the markets I monitor for today. As you can read in my May 17, 2013 post “Introducing Schannep’s Stop loss for the stock market," which you can find here, now we have two alternative stops. One strictly derived from the Dow Theory (primary bear market lows) which currently implies a loss of 7.63%; the other one derived from Dow Theorist Schannep, which stands at a modest loss of 3.86%. It’s up to each investor to decide, which stop to honor.

 

Data for May 22, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Last close		05/22/2013	165.93
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
13.60%	22.28%	7.63%
Alternative Schannep's stoploss:
Highest closing high		05/21/2013	167.17
16% stoploss from highest closing high			140.42
		Max Pot Loss %
		-3.86%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Exit December 20		12/20/2012	161.16
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