Thursday, October 9, 2014

Dow Theory Update for October 9: Secondary reaction for stocks continues unabated

Gold and Silver miners have not reconfirmed the primary bear market yet

US Stocks

The SPY, the Transports and the Industrials closed down and jointly violated the Oct, 7 secondary reaction closing lows. So, confirmed lower (minor) lows seem to suggest lower prices. I must stress, though, that I am not in the business of forecasting the length of secondary reaction. My focus is to gauge the primary trend which amounts to a time frame of 1-2 years. More about the average duration of primary trends here.

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, March 7th, 2014, and more recently, September 2nd, 2014, for the reasons given here, here, here and here.

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

The secondary trend is bearish, as explained here:

Here you have an updated chart (the red rectangles display the secondary reaction):

When will the secondary reaction end?

Gold and Silver

SLV closed down, and GLD closed up. The primary bear market wasreconfirmed on October 3rd 2014, as GLD finally broke below the June 27th, 2013 primary bear market closing lows (something which SLV had already done on Sept 17, 2014). As lower lows have been confirmed, the primary bear market has been reconfirmed.  

Eventually, the tug of war between an eternal secondary (bullish) reaction against the primary bear market and the primary bearish trend has been resolved in favor of the continuation of the primary trend. The old adage comes to my mind: “don’t fight the trend”.

Well, I am happy that I didn’t fight the trend and, while reporting the existence of a secondary bullish trend, I warned my readers that a secondary reaction is not the real thing and hence, we had to wait until the actual primary bull market signal, which, as we now see, has failed to materialize.

All in all, my strict application of the Dow Theory prevented me from become erroneously bullish (as famed Richard Russell, of the “Dow Theory Letters” wrongly did). We were close to a primary bull market signal, but being close means nothing under the Dow Theory. 

For the reasons I explained here, and more recently here the primary trend remains bearish. Of course, the secondary trend is bearish too.

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, as price action has just shown, 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. When will this vicious bear market end? I don’t know, and I don’t need to know. I only know that the Dow Theory will see to my being informed punctually when a new primary bull market is born. 

As to the gold and silver miners ETFs, SIL and GDX closed down, SIL has broken below the primary bear market lows, unconfirmed by GDX. So the primary bear market for SIL and GDX has not been reconfirmed yet.

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.

The Dow Theorist

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