Wednesday, June 12, 2013

Dow Theory Update for June 12: Dow Theory trailing stop raised. Profits likely to be locked in



 Gold and Silver might be making a bottom under Dow Theory


Today is another day rich in Dow Theory relevant events. With no more preambles let’s get started. 

Stocks

The SPY, Transports and Industrials closed down. The primary trend is bullish, and the secondary trend is bearish.


The secondary reaction lows of 06/05/2013 are our new Dow Theory stop, which is much tighter than the original stop (Mid November 2012 primary bear market lows) or Schannep’s stop loss (-16% from the highest closing highs).

The 06/05/2013 lows are now our “line on the sand” after the Transports rallied more than 3% in the last few days. According to the Schannep’s “flavor” of the Dow Theory, if either the Transports or the Industrials jointly violate with the SPY the 06/05/2013 lows we will get a primary bear market signal. Personally, I’d be happier to see the Transports itself (the index that underwent the +3% rally off the 06/05/2013 lows) violate its lows as I explained more in detail here.

In any instance, the Transports’ price action has established: (a) The low point of this secondary reaction; (b) our new “stop loss"” according to the Dow Theory.

It is worth mentioning that the new stop loss will help the investor lock in sizeable profits, should the market flash a primary bear market signal.

As you can see in the spreadsheet below, the unrealized gain for a position taken in the SPY on January 2, 2013 (when the primary bull market signal was signaled, as explained here), amounts right now to 10.74%.  Thus, even though, we will never exactly know at what precise point the primary bear market will be signaled (as the exit signal depends upon the price action of several indices, and we take closing prices, which may be significantly below the 06/05/2013 closing lows), we can confidently say that barring an overnight crash, the final profit figure will be between 8-10 percent. That’s not bad taking into account that such profit would have been made in less than 6 months. Please mind that I have amended the spreadsheet accordingly and the cell indicating “Maximum Potential Loss'” now reads “none," as profits have been locked in.

What would happen if the 06/05/2013 secondary reaction lows hold, and the indices made new highs. Then the primary bull market would be reconfirmed, and we would have a new primary bull market swing (more profits) with the benefit of having a narrower Dow Theory trailing stop based at the current secondary reaction lows. More about the Dow Theory trailing stop here.
 
Here you have an updated chart depicting the current situation. The red thick lines are the secondary reaction lows, which should hold.

Stock market is close to signaling a primary bear market signal

In my yesterday’s post, I wrote that the market must quickly rebound or else…more weakness will come. Today’s action has been another shoe to drop. Tomorrow may be the last chance to show technical strength. In the meantime, we are not fearful, as we have our well-placed  Dow Theory stop.

It is worth remembering  that the Dow Theory “flavor” I use is strongly influenced by Schannep. Under the “Rhea/classical” Dow Theory, it is even doubtful whether a secondary reaction is under way, and, accordingly, there is no imminent primary bear market signal (and, to increase risk, no new tighter Dow Theory trailing stop). More about Dow Theory “flavors” here.
 
Today’s volume was higher than yesterday’s, which is bullish, since the collapse in prices attracted mild volume. The overall pattern of volume remains, though, bearish short term.

Gold and Silver

GLD and SLV closed up. The primary and secondary trend is bearish.

However, I have noticed that SLV made on 06/07/2013 lower lows on a closing basis (the last recorded primary bear market lows on a closing basis were violated), whereas gold has refused to confirm for the last 4 trading days. According to the Dow Theory such non confirmation may be indicative that, at least, a counter movement (bullish) of secondary proportions may be ready to get started. The longer the non confirmation persists, the higher the odds for a bullish secondary reaction. By the way, Richard Russell, of the "Dow Theory Letters" seems to see gold bottoming.

Here you have an updated chart showing the non confirmation by GLD:

Gold has not confirmed silver's lower lows
   
In the meantime, the primary and secondary trend is bearish.

SIL closed unchanged. GDX closed up. The primary trend is bearish, and the secondary trend is bullish.

Here you have the figures of the markets I monitor for today. Please mind that I have changed the stop losses for the SPY.

 

Data for June 12, 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
06/12/2013 161.75
Current stop level: Sec reaction lows

161.27




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




10.74% 19.20%      None.








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

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