Wednesday, February 18, 2015

Dow Theory Update for February 18: Industrials and Transports refuse to confirm SPY’s higher highs.

If you are interested in knowing how the Dow Theory fared in 2014 with  stocks and precious metals, you might be interested in this post.


The SPY, and Transports closed up. The Industrials closed down. On Thursday, January 29, the Industrials violated their secondary reaction lows. On Friday 30, the Transports did so. However, lack of confirmation (as the SPY refused to violate its secondary reaction lows) prevents us from declaring a primary bear market. Some market analysts have declared the existence of a primary bear market. Read my post “It is not a primary bear market” in order to understand why the proper interpretation of Schannep’s Dow Theory negates a primary bear market (at least for the time being).

The SPY has for three consecutive days (until yesterday) bettered its primary bull market closing highs. The Transports and the Industrials have not confirmed yet. So we cannot say that the primary bull market has been re-confirmed, and hence we cannot declare the secondary (bearish) reaction as a thing of the past. One of the tenets of the Dow Theory is that the longer non confirmation persists, the higher the odds for a trend reversal.

Stocks set up for a primary bear market signal on January 23rd, as explained here. However, a “set up” is not the “real” thing. So we have to wait. Such a set up will be "deleted", once the SPY's higher highs get confirmed.

The primary trend remains bullish, as explained here and here.

The secondary trend is bearish as explained here.

Gold and Silver

SLV closed down and GLD closed up. The primary trend is bullish as explained here.

The secondary trend turned bearish on February 6th, 2015 (secondary reaction against the primary trend) as explained here. The secondary reaction continues running its course. SLV rallied modestly (from February 6 to February 13). However, such rally was a meager ca. 3%, which in volatility-adjusted terms, is not enough to set up SLV and GLD for a primary bear market signal. Had SLV have rallied by a more ample amount (let’s say at least more than 5.4%, which is one recent volatility-adjusted reading, as you can see here), then the set up would have been completed.

Thus, the subsequent violation of the February 6th closing lows did not flash a primary bear market signal. We still have to wait for a rally of sufficient volatility-adjusted magnitude for SLV and/or GLD (let’s say ca. more than 5.4% for SLV and 3.85% for GLD, as per recent volatility readings) so that the set up for a primary bear market signal is completed.

In the absence of such a rally, a primary bear market would be signaled if both SLV and GLD violated their November 5th, 2014 closing lows (primary bear market lows). Please mind that there are several ways of declaring a primary bear market under the Dow Theory. The most common and classical sequence "primary bull (bear) swing, correction, rally (pullback) and final breakout", is just one of the ways of declaring a change of primary trend. As I wrote here:

" [a] primary bear market can be signaled in four alternative ways:

a) The “classical”.

b) The -16% decline.

c) The lows of the last completed secondary reaction.

d) The primary bear market lows (when a new primary bull market has been born, and no secondary reaction has developed yet).

Cogitate these 4 primary bear market signals, and you’ll greatly increase your odds of being on the right side of the market. Please mind the words of Rhea: He doesn't talk certainties but probabilities. Take your time in studying the four signals, as it took me deep reading of Rhea and Schannep to be able to systematize, digest and understand the deep meaning of these 4 signals."

When it comes to precious metals, the -16% decline is not a valid primary bear market signal, as such a figure was obtained empirically for just US stocks by Dow Theorist Schannep, of "". However, the remaining three signals remain fully applicable to precious metals. 

Here you have an updated chart:

Secondary reaction (red rectangles on the right of the chart) against primary bull market

Gold and Silver miners ETFs (GDX and SIL)

As to the gold and silver miners ETFs, SIL and GDX closed up.

On January 12, 2015, a primary bull market was signaled. More information as to the details of such a signal here.

For the reasons explained here, I am doubtful as to whether we can declare a secondary (bearish) reaction for SIL and GDX yet. Subsequent market action seems to negate a secondary reaction. However, any decline below the 2/17/2015 closing lows would unambiguously prompt me to declare the existence of a secondary reaction. So let's be alert.

The Dow Theorist.

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