Agreements and disagreements with Richard Russell
Richard Russell, of the Dow Theory Letters, has turned cautiously bullish on stocks.
I agree with Russell as to the existence of a bull market, more exactly, a primary bull market.
Now begins my disagreement.
True to a bull market condition, he advises his readership to be invested in the DIA (Dow Industrials ETF). However, he insists to put a stoploss at 154, which is an extremely narrow stop, since the DIA closed last Thursday 25th at 155.12. In other words, Russell suggests placing a stop 0.72% percent below recent price action. I am writing these lines before the open of Friday 26th, so it is very likely that any minor decline will result in the trade being stopped out. By the way, the basic tenet of the Dow Theory (of any flavor whatsoever), namely, the principle of “confirmation” seems to be ignored by Russell. Furthermore, Russell seems to forget that another basic tenet of the Dow Theory is to disregard movements not reaching 3%, as they are simply noise.
Therefore, I disagree as to the suggested stoploss, which has no basis under the Dow Theory, be it the “classical” or the “Schannep” one.
Orthodox Dow Theory of any flavor whatsoever makes clear that our exit point should be either be the last recorded primary bear market lows or the last recorded secondary reaction lows, which ever is higher. Under proper Dow Theory, there is no place for whimsical stops, which more often than not end up being run. Proper Dow Theory stops strike a wonderful balance between containing losses, and giving the trade enough lee-room not to be stopped out by noise or stop running. More about the Dow Theory trailing stop here.
As I wrote here:
“[o]ne can put an arbitrary and narrower stop (i.e. 8% below current prices); however, such a stop is technically defective, and wouldn’t benefit from the extraordinary resilience of the Dow Theory record. This wouldn’t be Dow Theory”.
The SPY, Industrials and Transports closed up.
Today’s volume was markedly lower than yesterdays, which is bearish as higher prices were not confirmed by expanding volume. The overall pattern of volume is bearish.
Gold and Silver
SLV closed down, and GLD closed up. The primary trend is bearish, as explained here and reconfirmed bearish here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.
GDX and SIL, the gold and silver miners ETFs closed up.
The secondary trend for GDX and SIL is bullish, as explained here.
Here you have the figures for the SPY, which represents the only market with a suggested open long position.
|Data for July 26, 2013|
|DOW THEORY PRIMARY TREND MONITOR SPY|
|Bull market started||06/24/2013||157.06|
|Bull market signaled||07/18/2013||168.87|
|Current stop level: Bear mkt low||157.06|
|Unrlzd gain %||Tot advance since start bull mkt||Max Pot Loss %|
The Dow Theorist