Tuesday, November 26, 2013

Dow Theory Update: Day to think about the unrealized profits in SPY

Precious metals weak (as usual)

Today’s been a day without any Dow Theory relevant event. However, it is a good day to think about the current long position in SPY, its unrealized profits and, more importantly, the likelihood for these profits to be erased or locked in by subsequent market action.

The primary bull market was signaled on July 18, 2013. From our entry price at a theoretical 168.87 the SPY has climbed to 180.68 for an unrealized gain of 6.99% in ca. 4 months. Here you have a chart which contains the last four months of price action:

Anatomy of the last primary bull market signal

We also know that our Dow Theory trailing stop lies at the last recorded secondary reaction lows, which stand at 165.48 (such lows were made on Oct 8). More on this stop and the corresponding chart, here.

Thus, if the markets were to reverse and start heading south, then we could lose 2.05% (approximately, since we never know the exact level at which confirmation by two indices occurs). However, such loss is unlikely to be realized because as you can see from the spreadsheet below the total advance since the start of the current primary bull market amounts to 15.04%. It is not likely for the markets to decline 15.04%  without any intervening secondary reaction (which would raise our Dow Theory stop, as has occurred two times within the current primary bull market swing) . Hence, if we had a secondary reaction, our stoploss would be further raised, and, accordingly, our likely loss would be diminished.

Furthermore, we know that Schannep’s stoploss is placed 16% below the highest closing high. More about this vital stop and the thoughts behind it here.

So, if prices were to jump just by a mere 1%, we would reach price level which would allow for the placing of a stop of 16% (Schannep’s stop). Such stop would be at a higher level than our current stop which is placed at the last recorded secondary reaction lows, as explained above.

Thus, we have three scenarios (and no other one):

a)     Either markets go up before undergoing a secondary reaction. In such a case, Schannep’s stop loss will be applicable.

b)     Or markets go down in a secondary reaction whose lows are, by necessity, above the last recorded secondary reaction lows (I write, “by necessity," since lower lows imply a primary bear market signal and, hence our exit point). In such case, a Dow Theory trailing stop would be raised.

c)     Or the markets go down in earnest without any intervening secondary reactions, and we get stopped out at the current Dow Theory trailing stop (which would be our worst-case scenario).
Therefore, while anything may happen, the most probable outcome is a higher stop. Let’s see what subsequent market action has in store for us, as I was just trying to engage my readership into Dow Theory-based thinking.

US stocks

The Industrials and SPY closed up. The Transports 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 and November 13th, for the reasons given here and here.

Today’s volume was higher than yesterday’s. This is bullish, as higher prices were met by stronger volume. I’d label volume as neutral for the reasons given here.

Gold and Silver

SLV, and GLD closed down. For the reasons I explained here, and more recently 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.

As to the gold and silver miners ETFs, SIL and GDX closed down. The primary trend is bearish, as was profusely explained here and here. Likewise, the secondary trend is bearish.

All in all, the last shoe to drop for the precious metals sector would be GLD and SLV reconfirming the ongoing primary bear market. Until this happens, the secondary trend is bullish, and this is the only “bullishness” to be found in this beleaguered sector.

Here you have the figures for the SPY which represents the only market with a suggested open long position:


Data for November 26, 2013


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
11/26/2013 180.68
Current stop level: Secondary reaction low

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

6.99% 15.04% 2.05%

The Dow Theorist

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