Dow Theory Update for June 10: Nuances concerning the appraisal of secondary reactions.

Trends remain unchanged.

We know that the appraisal of secondary reactions is not an easy feat. Accordingly, Rhea wrote that “probably no two students would agree on any rule for selecting and tabulating important secondary reactions” (Rhea’s “The Dow Theory”, Fraser Edition, page 61).

Thus, recent price action, and my particular divergence from Schannep’s Dow Theory, as far as “in the clear” signals are concerned (which set the stage for the development of a new secondary reaction), prompted one reader of this blog to email me. Basically, he was asking (on June 4) whether, as per my reading of the Dow Theory, a secondary reaction had been signaled given the Transports long and ample decline.

Here comes the edited version of my email, which I hope may serve to hone your skills when it comes to gauging the existence of a secondary reaction:

Hi XXXX,

I answer you with the technical makeup of June 4 (date of your email). A red dotted vertical line on the right side of the chart marks that date.

Please find below an updated chart. The blue round arrows on the right of the chart display the last recorded closing highs. The SPY and the INDU bettered the last recorded primary bull market highs, whereas the TRAN failed to do so. As per my interpretation of the Dow Theory, I consider the primary bull market reconfirmed and from this higher point, I set the “clock” to zero in order to appraise the start of the next secondary reaction.

No secondary reaction for stocks, yet or never

 

Since the TRAN did not better the last recorded primary bull market highs, I take the last minor high (which must be close in time to the INDU and SPY’s highs) as the relevant high from which to count the start of a new secondary reaction.  Thus, I don’t count days for the TRAN starting from the last primary bull market high. I just take the minor high in the vicinity of the highest highs made by the SPY and INDU.

So now we can count the total number of days elapsed between the last recorded high (prim bull market high for SPY and INDU and relative high for TRAN), and the last recorded closing lows:

INDU: 12  days down.

SPY: 10 days down.

TRAN: 9 days down (13 days down, but last closing low was only 9 days after the last closing high).

 

So please mind that in order to assess the total number of down days for the Transports, I only consider the time passed between the last high and the last low.

Average of down days (making lower lows) = 10.33 days, which fulfills the time requirement for a secondary reaction as per Schannep.

However, on June 4, the extent requirement was not met. Neither the SPY nor the INDU declined  more than 3% from the last recorded primary bull market highs.

 

Furthermore, on June 9 (date of the last lows hitherto seen), neither the INDU nor the SPY reached  the 3% benchmark. As of this writing, this situation has not changed. 

All in all, when two indices better the last recorded primary bull market highs, and one fails to do so, I reset to zero the counting of days for a new secondary reaction for all indices. This implies that the relevant highs to be considered for the index that failed to better its primary bull market highs must be a minor high.

Please bear in mind that my “variation” when it comes to applying Schannep’s Dow Theory, is neither “better'” not “worse" than the original. It merely reflects my personal preferences. I am aware that by:

a) Using Rhea’s page 77 stop (lows of the last preceding completed secondary reaction) (more here: http://www.dowtheoryinvestment.com/2015/02/dow-theory-special-issue-schannep-and-i.html )

b) and defining secondary reactions earlier as I just require two indices to reconfirm a primary movement,

I tend to have narrower stops, which not may be ideal for people with a greater drawdown tolerance.

//

I am writing on June 11, before the close, as far as I see, it is highly unlikely that a secondary reaction for stocks will be signaled today.

P.S.: Primary and secondary trends remain unchanged for stocks, GLD, SLV and their miners ETFs GDX and SIL. Here you find the last in-depth explanation as to the current state of trends:

http://www.dowtheoryinvestment.com/2015/05/dow-theory-update-for-may-18-primary.html

As to US debt, a primary bear market signal was signaled on June 3rd, 2015, and the primary trend for the EUR remains bullish which tends to confirm the bearishness of US debt. Here you have the details:

 http://www.dowtheoryinvestment.com/2015/06/dow-theory-special-issue-us-bonds.html

Sincerely,

The Dow Theorist