Dow Theory Update for October 31: Stocks “in the clear”. Primary bull market signaled

Precious metals true to their primary bear market condition.

Time remains in very short supply. So I hope in the coming days to provide you with more ample information.

US STOCKS

The Transports made a higher closing high on October 28th. The SPY and the Industrials confirmed on October 31^st.

Since according to my own interpretation of the Dow Theory the primary trend was bearish, the confirmed breaking up of the last recorded primary bull market highs signals a new primary bull market.

So, the primary bear market I spotted on October 10^th (post of October 15^th) has been short lived, as technically we are now, once again, in a primary bull market. I spare no words: it is a whipsaw.

The last few weeks have been very intensive as far as the Dow Theory is concerned. As you well know we are used to seeing days and weeks go by with no noteworthy event under the Dow Theory. However, the last few weeks have been filled with Dow Theory relevant events.

Furthermore, all Dow Theorists have learned a lot about the Dow Theory in the last few weeks, as the market with an uncommon behavior has put our application of the Dow Theory to the test. There are times when the market is easy to “read” under the Dow Theory. Other times, though, it is not so easy to discern the primary trend as the rules laid down by Rhea are not exact science but are subject to interpretation.

Thus, the secondary reaction of August-September and the last primary bear market signal (just a secondary reaction for some Dow Theorists) have not been unanimously evaluated by all Dow Theorists.

More importantly, the Dow Theorist I respect most, Schannep, and I had diverging opinions as to the application of the Dow Theory to the current market.

I personally (as explained here) was of the opinion that the violation of the lows (August 7th, 2014) of the preceding secondary reaction entailed a primary bear market signal. On the other hand, Schannep, thought that such lows were not to be taken into account as the higher highs of September negated all validity to such secondary reaction lows and we had to wait for a new primary bear market signal setup (which implies a secondary reaction followed by a +3% rally in at least one index).

This is a complicated matter, as Schannep and I have (and still are) been dealing this matter through private correspondence, and there is no clear-cut answer.

The fact that this specific signal has “failed”, if we are to take into account the last recorded secondary reaction lows, does not necessary imply that my interpretation was wrong. Traders know that an individual trade can be “good” or go “sour” irrespective of the correctness of the rules followed. The same applies for being “right” by ignoring the last completed secondary reaction lows (and accordingly the primary bear market signal) and thus having remained invested in the market and avoided a whipsaw. Furthermore, my interpretation (for which I find solid base in Rhea’s book) looks “bad” after the fact, that is, now that stocks have made higher highs. If we had had a repeat of the 1987 market crash, then my interpretation would have looked brilliant, as those ignoring such secondary reaction lows would have endured a larger loss (or a huge one, should the +3% rally have failed to materialize). I’d rather prefer being whipsawed and take a small loss that having to risk a higher loss. I think of long term survival. I rather prefer to endure three -5% whipsaws in a row than being one day killed in a stock market crash. Veteran traders know what I am talking about and need not further explantions.

Readers really intent on understanding the Dow Theory should re-read these lines many times. It is not an easy read and, I repeat, it has been difficult even for experts such as Schannep. As to the rest of the Dow Theory fraternity, it was divided into two camps too, albeit for very weak reasons (i.e. confusing relevant secondary reaction lows for any low). Some of them saw a bear market signal and others didn’t. I insist, though, that the only Dow Theorist that saw no primary bear market signal and made a well thought-out case for his bullish stance is Schannep.

In the next days, I hope to be able to provide a deeper explanation as to why I considered the last completed secondary reaction lows as relevant to declare a primary bear market and why Schannep didn’t. From your reading his opinion and mine you can learn a good deal of the Dow Theory (in my opinion the very entrails thereof) under challenging conditions.

Gold and Silver

SLV and GLD closed down. The primary bear market was reconfirmed on October 3rd 2014, as GLD finally broke below the June 27^th, 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 bearish.

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. The primary bear market was re-confirmed as explained here.

 
 

The secondary trend is bearish.

The primary trend for SIL and GDX is clearly bearish, as was profusely explained here and here.

Sincerely,

The Dow Theorist