Friday, February 7, 2014

Dow Theory Update for February 7: Stocks set up for either a primary bear market or re-confirmation of primary bull market.

Dow Theory trailing stop raised and profits likely to be locked in.

Today is one of those sparse days which are relevant under the Dow Theory. However, since one never knows when the “relevant” day is going to occur, the diligent Dow Theorist should monitor the markets daily. With no more preamble, let’s get started.

US stocks

The Transports, the Industrials and the SPY closed up. Volume was bullish as today’s volume was higher than yesterday’s. However, I have not seen a volume explosion (but close, as the SPY volume was well above the 50 days moving average of volume). If next Monday stocks closed down on shrinking volume, I would begin to see convincing bullish volume action pointing at the reconfirmation of the primary bull market.

Today’s an important day because the SPY and also the S&P 500 rallied more than 3% off the February 3rd closing lows. I acknowledge Schannep’s advice to also keep an eye on the “real thing”, the S&P 500, instead of its surrogate, the SPY, in order to be sure of the existence of a +3% rally, since while closely tracking each other, they could slightly differ sporadically.

Take a look at the spreadsheet below:


                          INDU            TRANS         SPY    S&P 500
Closing high 15794.08 7242.33 179.68         1797.02
Closing low 15372.8 7053.75 174.17     1,741.89
total rally 1.02740 1.02673   1.03163  1.031649

You can see than only the SPY (S&P 500) rallied more than 3% thereby setting up the stock market for:

a)     A primary bear market signal, if stocks went lower and violated the February 3rd closing lows.
b)     A reconfirmation of the primary bull market if stocks continue up and break above the last recorded closing highs (December 31st for the SPY and Industrials and January 23rd for the Transports).

One thing is clear: By having had a rally exceeding 3% in at least one index, we know now that the relevant lows of the secondary reaction have been made. We finally can draw our line on the sand (something we could not do until we get the +3% rally in at least one index). If those lows hold, then sooner or later the primary bull market will be reconfirmed. If the lows are violated, we can no longer talk of “secondary reaction” but instead of the first leg of the new primary bear market.

Take a look at the chart below, which shows the relevant lines to observe.

Soon we should know whether a primary bear market is signaled or the bull market is reconfirmed

Furthermore, today’s action results in our raising our Dow Theory trailing stop. Since now we know our new “exit” point, namely, the secondary reaction lows of February 3rd, we approximately know our new exit point, should the markets head south. Since our primary bull market signal was flashed on July 18th, 2013 with the SPY at 168.87 and the secondary reaction closing low for the SPY lies at 174.17, we deduct that a profit of ca. 3.14% is likely to be locked in. This is no certainty as markets can gap down; but one thing is clear: Our Dow Theory trailing stop has been raised and the current position is likely to end up in the black. More about the Dow Theory trailing stock, here.

The primary trend remains 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.

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

Gold and Silver

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

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.

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 7, 2014


Bull market started
06/24/2013 157.06
Bull market signaled
07/18/2013 168.87
Last close
02/07/2014 179.68
Current stop level: Secondary reaction low


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

6.40% 14.40%      None

The Dow Theorist

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