Monday, October 21, 2013

Dow Theory Update for October 21: Richard Russell turns bullish on gold

Stocks take a breather

Last Friday Richard Russell, of the “Dow Theory Letters”, turned bullish on gold. His point and figure chart showed a dramatic upside reversal out of a consolidation pattern, which also happened to break above the declining trendline. While Russell hasn’t nuanced the time frame for his bullishness on gold, I guess he’s talking of a move of primary importance.

What’s my take on it? Point and figure charts while not always 100% right, tend to put you on the right side of any impending movement. However, I feel it is too early to say that the trend has changed. At best, the breakout seen on the point and figure chart could only be construed as portending a change in trend of secondary importance (that is some weeks to some few months).

Furthermore, here I alerted the followers of this blog about SLV not confirming GLD’s lower lows on October 11 and the bullish implication of such not confirmation. However, I also stressed that as per the Dow Theory any new bullish movement, if any, was merely of secondary proportions. Here you have what I wrote:

“Such a lack of confirmation may be hinting that the current pullback might be running out of gas. The longer the non-confirmation persists, the higher the odds for a trend reversal (of secondary proportions, given that the unconfirmed lows relate to a modest pullback)”

Now, in retrospective, I realize I called a minor bottom in both metals. However, according to the Dow Theory, I will not see a primary bull market until the secondary reaction closing highs made on August 27 are jointly violated by SLV and GLD. The ongoing primary bear market has been with us since almost one year. On many occasions, Russell, Sinclair and others have attempted to call the bottom in a premature fashion, since the movement erroneously labeled as a new primary bull market qualified as a secondary reaction, at best, if we were to rigorously apply the Dow Theory rules. While eventually they will be proven right one day, I stick to my rules.

Here you have an updated chart to clarify the current picture:

SLV and GLD are still in nowhere's land: Too early to call it a primary bull market

US stocks

The SPY and Transports closed up. The Industrials closed down.

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

The primary trend was reconfirmed as bullish on October 17th, for the reasons given here.
Today’s volume was lower than yesterday’s, which is bearish, as higher prices (Nasdaq closed also up) were met by contracting volume. I consider volume to be bearish for the reasons given here and 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 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.



Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
10/21/2013 174.4
Current stop level: Secondary reaction low


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

3.27% 11.04% 2.05%


Bull market started
06/26/2013 10.59
Bull market signaled
08/14/2013 15.36
Last close
10/21/2013 13.03
Current stop level: Primary bear mkt low
06/26/2013 10.59

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

-15.17% 23.04% 45.04%


Bull market started
06/26/2013 22.22
Bull market signaled
08/14/2013 28.7
Last close
10/21/2013 24.93
Current stop level: Primary bear mkt low
06/26/2013 22.22

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

-13.14% 12.20% 29.16%

The Dow Theory

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