Friday, January 8, 2016

Dow Theory Update for January 8: How long will it take for the next primary bull market signal to be flashed?

Trends unchanged

Yesterday, January 7th, the US stock market made lower confirmed lows. As I have explained in the last two posts (here and here), the primary bear market is in full gear and no secondary (bullish) reaction against the primary bear market has occurred yet

In a past post, I explained that following a primary bear market signal stocks decline an average -13% over the next 4 months.

The takeaway was clear: If the past is to serve us as a (rough) guide, primary bear market signals entail further declines, and hence should be honored.

I wrote in the past that the Dow Theory, unlikemoving averages, is not prone to whipsaws. In other words, it is not so easy to reverse a “bull”/”bear” signal. It takes "time" and "extent".

Thus, I can say in almost full confidence that it is highly unlikely that a primary bull market signal will be signaled in the next three weeks. Why am I so cocky? Because we know that according to the Dow Theory for a primary bull market signal to be signaled we need first a secondary reaction and a pullback. For a secondary reaction to exist we need at least 2 calendar weeks of ascending prices on at least two indices. Thereafter, we need at pullback lasting at least 2 days. And both the secondary reaction and the pullback must exceed the 3% threshold.

Since yesterday we saw the lowest lows of the current bear swing, we know that even if such lows were the final bottom, we should wait at least two calendar weeks (sec reaction) + 2 days (pullback) + at least 1 day (day of breakout above sec reaction highs) for a primary bull market signal to be signaled. This amounts to ca. a minimum of 3 weeks (to be added to the already 4 weeks elapsed since the primary bear market was signaled on December 11). 

Even if the last recorded primary bull market highs of 11/3/2015 (for the SPY and INDU) and 10/23/2015 (for the TRAN) where jointly broken out (which is an alternative primary bull market signal) with no intervening secondary reaction, this would take time as well, as the SPY is -8% below its 11/3/2015 closing highs. Bottom line: it is not so easy to get Dow Theory signals.

Now, in real time, you see why the Dow Theory, unlike moving averages, is not prone to whipsaws. We just take the signal and weed out the noise.

Furthermore, following the primary bear market signal of December, by yesterday’s close the SPY had further declined by -3.87%. Statistically, the odds still favor further declines. However, even if we had seen the bottom yesterday, a decline of -3.87% means for investors that a new “buy” (primary bull market signal) would be near our past exit level of December 11. In other words, we would have escaped turbulences and the real risk of a crash (all of them have been preceded in history by a primary bear market signal), while our “re-buy” would be at a price similar to our exit price. Why I am so sure? Because, given the definition of secondary reactions under Schannep’s Dow Theory, primary bull market signals tend to occur at ca. 4-6% above the primary bear market lows.

All in all, if the market obliges and further declines another 1-2% we could be pretty sure of getting a re-entry price lower than our exit price (which is a good thing for obvious reasons). Please mind that this is precisely what happened on August 20 (primary bear market signal) and October 7 (primary bull market signal). The “re-entry” (new buy signal) was at a lower price than the exit dictated by the primary bear market signal of August 20.


The primary and secondary trend is bearish, as explained here:

Here is an additional post concerning the likely decline to follow primary bear markets signals:

Following the primary bear market signal of Friday 11th December, stocks made lower confirmed lows on 12/18/2015 and 1/7/2016. Hence, any secondary (bullish) reaction is to be counted starting from these last recorded lows. Hitherto, no secondary reaction has materialized yet.


The primary and secondary trend is bearish as explained here.


The primary trend remains bullish as explained here.

SIL has violated its 9/10/2015 closing low (last primary bear market low) unconfirmed by GDX. Both ETF miners are under a strong secondary reaction (displayed by the red rectangles on the chart below).

We have to wait for GDX to confirm. Until then we cannot declare a new primary bear market. The longer it takes for GDX to confirm, the better the odds for the primary bull market to survive. However, price action is king. Since mid-November GDX has refused to confirm.

I see that gold and silver miners ETFs seem to be weathering the storm afflicting US (and world) stocks. Given pervasive weakness all around, their relative strength might be indicative that strong hands are quietly accumulating such stocks.

The Dow Theorist

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