Dow Theory Update for February 18: Precious metals shine

Stocks take a breather

Let’s begin with our Dow Theory commentary for today.

US stocks

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

Volume (total volume for the S&P 500) was bullish, as higher prices were supported by expanding volume. However, if we use as our reference the SPY's volume, volume was bearish as today's volume dramatically contracted.

The overall pattern of volume remains bearish, though. Furthermore, the high volume we saw when prices were declining could turn into supply as now prices advance and hence make the rally stall. In other words, if volume had shrunk when prices approached their early February lows, then we would have to fear less profit taking as prices rally.

Moreover, I see that today’s TRIN was bearish, and that my pet ratio (the ratio of SPY’s volume to total S&P’s volume) has, once again, dramatically declined (it stands at 0.68), which tends to signal short term tops. My ratio shows that speculative fervor (which tends to fuel short term movements) is drying out.

In any instance, and regardless of volume, the market remains caught in a technically complicated juncture. If the February lows were violated a primary bear market would be signaled. On the other hand, if the last recorded closing lows where broken out, the primary bull market would be reconfirmed. You can gather more information about the current juncture, here and here.

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

The primary trend was reconfirmed as bullish on October 17^th and November 13th, for the reasons given here and here.

The secondary trend is bearish (secondary reaction against primary bull market), as explained here.

Gold and Silver

SLV and GLD closed up on strong volume. For the reasons I explained here, and more recently here, and in spite of all the bullishness than now surrounds gold and silver, the primary trend remains bearish.

For the primary trend to turn bullish, SLV and GLD should jointly break above the secondary (bullish) reaction highs. As a reminder, the secondary reaction closing highs were made on August 27^th, 2013 (shown with blue horizontal lines). From such highs the market declined without jointly violating the June 27^th, 2013 primary bear market lows (shown with red horizontal lines). Once again, we see the importance of the Dow Theory tenet of “confirmation”. GLD briefly traded below the horizontal red line; however, since SLV did not confirm, a reconfirmation of the primary bear market was averted. Now we are seeing bullish action; nonetheless, such a bullish action must be put in context or, more accurately, put in the context of the proper timeframe. Thus, according to the Dow Theory the bullishness we are seeing merely is the “secondary trend” (actually, the secondary bullish reaction against the primary bear market). It is too premature to qualify the primary trend as bullish. A primary bull market signal will be flashed when jointly SLV and GLD break above the blue horizontal line (secondary reaction highs). 

By the way, I alerted that the secondary trend turned bullish long ago (on July 22, 2013), when most market pundits were solidly bearish, as you can read here. Now, those very pundits are very bullish as only the sky was the limit. I take the middle road based on the Dow Theory: Since July 22, 2013 there was technically good reason not to be so bearish; on February 14th, 2014, there is no reason to be long term so bullish.

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.

On a statistical basis the primary bear market for GLD and SLV is getting old. More than one year since the bear market signal was flashed has elapsed. However, I am extremely skeptical as to the predictive power of statistics. I prefer price action to guide me, and the Dow Theory tells me that the primary trend remains bearish until reversed.

Furthermore, the June 27, 2013 lows remain untouched. The longer this situation lasts, the higher the odds that something might be changing. But I wait for the verdict of price action.

As to the gold and silver miners ETFs, SIL and GDX closed up. The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GLD are not in a primary bull market.

The primary trend for SIL and GDX remains, nonetheless, bearish, as was profusely explained here and here.

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

  

Data for February 18, 2014
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		02/18/2014	184.24
Current stop level: Secondary reaction low			174.17
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
9.10%	17.31%	None

Sincerely,

The Dow Theorist