Dow Theory Update for October 2: Stocks close down but refuse to make lower lows

Richard Russell might be on to something

Richard Russell, of the “Dow Theory Letters” brought our attention to the “broadening formation” that is becoming apparent in the Dow Industrials. The broadening formation is made of five ways: three ways up and two corrective ways down.

The chart below (weekly chart of the Industrials since 1997) shows the broadening formation as it stands now.

According to Russell the broadening formation spells trouble for stocks (on a very long term basis)

 Russell reminds investors that such formations tend to be bearish, and that it is not unlikely that the trendline connecting the lows gets violated. This would imply the Industrials at ca. 5000. Not a rosy scenario.

What’s my personal take on Russell’s view?

I think he may be on to something. Such patterns, while not always right, increase the odds for a reversal of the current bullish trend.

What to do then? Run for the exits? No. First of all, we have no guarantees that the stock market will play out as “predicted” by the broadening formation. What if this time prices break above the trend line connecting the top in a valid breakout fashion and never come back? We really don’t know, and more importantly, we don’t need to know.

Here is where the Dow Theory (be it Schannep’s or Rhea’s) comes in handy. If this time the broadening formation were “wrong," and the markets wouldn’t look back, then we would be fully invested, as the Dow Theory would continue signaling the primary trend as bullish. If, on the other hand, the broadening formation were right, and the stock market would start heading south, then we would get a primary bear market signal, and we would be safely out of stocks before the carnage starts decimating one’s equity.

All in all, knowledge is good, and the more we know the better; however, we have to learn not to be overwhelmed by an excess of information. Success in the markets doesn’t take a PhD, or encyclopedic knowledge of all technical patterns. Success in the markets (or at least, a lesser degree of failure if everything goes under) merely requires the mastery of timing (“tell me when to buy, not what to buy”), which in itself is not necessarily difficult, and the protection of your capital (i.e. by making sure about the legal title to your shares). What is difficult is to keep things simple, since our internal biases prompt us to make things unnecessarily complicated.

US Stocks

The SPY, the Industrials and the Transports closed down.

The primary trend is bullish, as explained here, and more in-depth here.

The secondary trend is also bullish for the reasons explained here.

Today’s volume was lower than yesterday’s, which is bullish, as lower prices were not joined by expanding volume. I still see the overall pattern of volume as neutral, as I explained here.

Gold and Silver

SLV and GLD closed up. For the reasons I explained here, I feel the primary trend remains bearish. Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

Here, I explained that GLD and SLV set up for a primary bull market signal. However, a setup is not the same as the “real thing," namely the primary bull market; thus, many “setups” do not materialize and until the secondary reaction closing highs are jointly broken up, no primary bull market will be signaled.

SIL closed down, and GDX closed up. SIL and GDX, unlike GLD and SLV, are in a primary bull market under the Dow Theory, as explained here and here.

The secondary trend is bearish, which is tantamount to saying that there is an ongoing secondary reaction against the primary bullish trend, for the reasons given here.

Here you have the figures for the SPY, GDX and SIL which represents the only markets with suggested open long positions.

 

DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/24/2013	157.06
Bull market signaled		07/18/2013	168.87
Last close		10/02/2013	169.18
Current stop level: Secondary reaction low			163.33
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
0.18%	7.72%	3.39%

 

DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		06/26/2013	10.59
Bull market signaled		08/14/2013	15.36
Last close		10/02/2013	12.89
Current stop level: Primary bear mkt low		06/26/2013	10.59
Unrealized gain %	Tot advance since start bull mkt	Max Pot Loss %
-16.08%	21.72%	45.04%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		06/26/2013	22.22
Bull market signaled		08/14/2013	28.7
Last close		10/02/2013	24.49
Current stop level: Primary bear mkt low		06/26/2013	22.22
Unrealized gain %	Tot advance since start bull mkt	Max Pot Loss %
-14.67%	10.22%	29.16%

Sincerely,

The DowTheorist