Tuesday, December 10, 2013

Dow Theory Update for December 10: Precious metals come to live, momentarily escaping the “danger zone”

Dow Theory Letters and the Chinese bull market in stocks

Matt Kerkhoff, currently a contributor of the Dow Theory Letters, has stated that the Chinese stock market has recently turned bullish as a golden cross (50 day moving average crossing above the 200 day moving average) has just appeared on the chart.

I agree with Matt. However, I’d like to add that by applying the Dow Theory rules to the Chinese market (more specifically to the FXI -25 big companies- and HAO –small cap- ETFs) this blogger truly yours signaled the onset of a new bull market on September 12, 2013; that is almost three months in advance and 2.81% below current prices for FXI and 9.66% for HAO (I am writing before the open of December 10th). Here and here you can find the details of the primary bull market signal for Chinese stocks, which remains fully valid as of this writing.

I am not bragging, and it can be a failed signal. However, even if it were a failed signal (no technical system, or fundamental for that matter, can claim to be right 100% of the time), at least our losses would be much lower than those to be realized by investors using moving averages, as our entry point was several percentage points lower.

As an aside, I mentioned on September 12th that the primary bull market signal for Chinese's stocks was tailwind for the US stock market. The Dow Theory’s principle of confirmation may also be safely applied with more or less similar markets (i.e. Chinese and US stocks; gold and silver and their miners). Thus, I felt that the bullish signal on Chinese stocks was confirming the bullish signal we had seen in US stocks on July 18th. A similar assessment was made with the bullish signal for the gold and silver miners ETFs (GDX and SIL). The fact that the precious metals themselves (GLD and SIL) refused to signal a primary bull market under Dow Theory implied headwind for the miners, in spite of their own primary bull market signal.

Once again, we can see that the Dow Theory is much more responsive than the mere use of moving averages. 

A future post on this Dow Theory blog will make an in-depth comparison of the Dow Theory versus moving averages. The results will be astounding.

US stocks

The Industrials, Transports and SPY 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 lower than yesterday’s. This is bullish, as lower prices were not met by stronger volume. I’d label the overall pattern of volume as bearish.

Gold and Silver

SLV and GLD closed strongly up. 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. However, such set up will be nullified if GLD and SLV jointly violate the last recorded primary bear market lows, as I explained here.

Last Friday December 6th, I warned about the urgent need for positive action for SLV and GLD by saying that:

 "I see a very delicate technical picture for both SLV and GLD. If the reconfirmation of the primary bear market is to be avoided, both ETFs should start rallying now. Failure to escape “danger zone” right now, increases the odds for a dramatic decline."

Well, today’s action has been strong and timely enough to put SLV and GLD momentarily away from “technical” danger. Time, as Gann insisted, is a very important element of price action. Today’s strong action and its “timing” is a clear positive, and confirms the current bullish secondary trend. Here you have an updated chart displaying the epic battle being fought in the precious metals arena.

SLV and GLD started rallying at the right time. Has the re-confirmation of the primary bear market been avoided? Let' see

As to the gold and silver miners ETFs, SIL and GDX closed strongly up. The primary trend is bearish, as was profusely explained here and here. Likewise, the secondary trend is bearish. One strong day is not enough to change the trend under the Dow Theory; not even the secondary one.

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


Data for December 10, 2013


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
12/10/2013 180.75
Current stop level: Secondary reaction low


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

7.03% 15.08% 2.05%


The Dow Theorist

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