Dow Theory Update for June 5: Secondary trend for stocks turns bearish

Primary trend for stocks continues bullish.

Readers of this Dow Theory blog know that the Dow Theory can be boring for those looking for hectic action. Days pass by and trends remain the same.

Well, today is not one of these dull days. According to the Dow Theory, today we can label the secondary trend of stocks as bearish. Today, the SPY, Industrials and Transports closed down. By closing down, the requirements to declare the existence of a secondary reaction according to Schannep’s Dow Theory “flavor” have been fulfilled, since:

1.      Since the last recorded closing highs, prices have receded for more than 10 days on two of the three indices we monitor. The Transports have been going down for 12 trading days, the SPY for 10 days and the Industrials for 6 days. 

2.     At least two indices have lost most than 3% from the last recorded closing highs.

 Here you have the percentages lost by each index:

	DIA	TRANSPORTS	SPY
closing High	15409.39	6549.16	167.17
closing Low	14960.59	6138.36	161.27
Pct loss from	-2.913%	-6.273%	-3.529%
closing high

Therefore, we see that both the Transports and the SPY have declined more than 3% in the last few days.

So today both the time requirement and the extent requirement have been fulfilled, and, accordingly, we label all the price action that occurred since the last recorded highs as a secondary reaction against the primary bullish trend.

How long will the secondary reaction last? We really don’t know. We know that secondary reactions last as little as two weeks (in which case, the “new” secondary reaction would be dead by now) or as long as three months or even more.

We know, though, that given the nature of the Dow Theory, the secondary reaction should not:

a)     Go beyond the last recorded primary bear market lows (11/15/2012), which sit at 135.70 (for the SPY) and represent a price 18.79% below today’s prices. A penetration of such lows would immediately re-qualify the secondary reaction as a primary bear market swing. 

b)    Not even penetrate the -16% level from the last recorded closing highs. This is the so-called Schannep stoploss. According to Schannep’s research, which is partially echoed here, a decline from the top exceeding 16% is not a correction but a new primary bear market. 

If we judge from experience a secondary reaction can perfectly erase between 3 and 15% of the gains made by the last primary bull market swing. In our case, this primary swing started on November 15, 2012.

A secondary reaction is actually good news for the followers of the Dow Theory. Until now, our stoplosses where placed either at 135.7 (SPY) which corresponds to the primary bear market lows or at 140.42 (SPY) if we put our stop according to Schannep (-16% from the top). In either instance, both are too ample, albeit the only technically correct, stops.

However, the “natural” stop that provides us the Dow Theory tends to be a narrower one. This narrower stop is the secondary reaction lows. Once the secondary reaction lows are made, we wait for a rally off the lows of at least 3%, if the market then reverses and such secondary reaction lows are violated, we get a primary bear market signal. Such a primary bear market signal is our “stoploss” or exit point. More about it in my post Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory’s trailing stop”, which you can find here.

Here you have an updated chart highlighting the secondary reaction (blue rectangles).

It's official: Seconary reaction in the stock market

  

Today’s volume was higher than yesterday’s, which makes it a bearish volume day. The overall pattern of volume is now bearish.

Gold and Silver

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

GDX closed up and SLV down. The primary and secondary trend is bearish.

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

Data for June 5, 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		06/05/2013	161.2
Current stop level: Bear mkt low			135.7
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
10.37%	18.79%	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.