Wednesday, June 5, 2013

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.


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