Monday, August 18, 2014

Dow Theory Update for August 18: Stocks set up for either primary bear market signal or reconfirmation of primary bull market

GDX and SIL have not signaled primary bull market yet (but remain close to doing it)

US Stocks

The SPY, Industrials and Transports closed up.

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

The primary trend was reconfirmed as bullish on October 17th, 2013, and November 13th, 2013 and March 7th, 2014, for the reasons given here, here and here.

So the current primary bull market signal has survived three secondary reactions.

The secondary trend is bearish, as explained here and here.

Last Thursday, August 14th, the Transports rallied more than 3%. The SPY and Industrials didn’t reach the 3% level. However, according to Schannep’s Dow Theory, just one index rallying more than 3% off the secondary reaction lows sets stocks up for a primary bear market signal. The Dow Theory principle of confirmation doesn’t apply to the rally (or pullback) following the secondary reaction lows (or highs). Please read this post for an in-depth explanation which is vital to a proper understanding of the Dow Theory and in order to avoid costly mistakes.

Furthermore, today the SPY has also rallied more than 3% off the August 7th closing lows. Therefore, even though “confirmation” was not needed for the >3% in one index to set up stocks for a primary bear market signal, the setup has been confirmed.

Hence, we derive two implications:

a) The setup for a primary bear market signal has been completed.

b) We can affirm that the secondary reaction has put its final lows, since now there are only two options left: Either stocks break to new closing highs and the primary bull market is reconfirmed) or stocks violate the August 7th secondary reaction closing lows in which case we will no longer talk of a secondary (bearish) reaction, but the first leg of a new primary bear market.

Please mind that “set up” does not mean the actual signal. So now we have to closely observe the market in the coming days. Here you have un updated chart:

Will a primary bear market be signaled? Or will the primary bull market be reconfirmed?

Gold and Silver

SLV closed up, and GLD closed down. For the reasons I explained here, and more recently here 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 27th, 2013. From such highs the market declined without jointly violating the June 27th, 2013 primary bear market lows.

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. However, the secondary bullish reaction against such old primary bear market is also getting quite old. Tie. 

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.

On July 11th, I alerted the followers of this Dow Theory blog that SIL and GDX were close to signaling a primary bull market. Go to the relevant post and chart here. On July 22nd, I explained that the signal did not materialize yet, as you can read here. On August 12, I did the same, as you can read here.

Nonetheless, SIL and GDX remain within striking distance of the relevant closing highs to be broken up. So we have to keep our eyes glued on the SIL/GDX chart.

Please mind that a setup is not the real thing. So the primary trend has not turned bullish yet (or maybe “never”).

The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GDX are not in a primary bull market.

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

The Dow Theorist

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