Dow Theory Update for June 22: A closer look to the current US stock market situation

How the classical and Schannep's Dow Theory complement each other

I am writing before the close.

US STOCKS

The primary trend (as determined by Schannep’s Dow Theory) is bullish, as explained here and here.

The secondary trend is bearish (secondary reaction), as explained here.

As I alerted here, US stocks have set up for a primary bear market signal. The Industrials, the Transports and the SPY have rallied by more than three percent. Thus, unambiguously the set up for a primary bear market is beyond questioning. However, at the same time, it seems more likely that such strong rallies (while setting up the market for a primary bear market signal) are harbingers of a break up above the last recorded primary bull market highs of April 20^th. We will not jump the gun, and wait for market action. Until now only the SPY (and S&P 500) has broken up its previous primary bull market highs. Thus, anything may happen.

I’d like to further explain the current situation. The chart below will give you some guidance.

As I explained here, both Schannep’s and the “Rhea/classical” Dow Theory (which only uses two indices) are undergoing a secondary (bearish) reaction against the primary bull market. Furthermore, both Dow Theory flavors have setup for a primary bear market signal.

Hence, we have two alternative and equally valid possible scenarios.

Scenario 1. Classical/Rhea Dow Theory

Just look at the Industrials (top) and Transports (middle) indices on the chart below. As you can see the last recorded closing highs were made on April 20^th. From that date a secondary reaction developed (orange rectangle). The lows of the secondary reaction were made on  May 19^th (Industrials) and May 13^th (Transports). Thereafter, both indices rallied more than 3% (albeit, only one index suffices) and setup stocks for a primary bear market signal. Look at the red horizontal lines. They show the relevant levels to be jointly violated for a primary bear market to be signaled.

Conversely, if the blue horizontal lines (last recorded primary bull market closing highs) were jointly broken up, the primary bull market would be reconfirmed, and, thus, we would set our “clock” to zero in order to appraise the next secondary reaction.

Scenario 2. Schannep’s Dow Theory

According to Schannep’s Dow Theory a secondary reaction started on April 20^th (as with the classical Dow Theory). However, Schannep’s Dow Theory requires for a signal to be flashed that the SP 500 must be present (more about this, here)

In other words, for a primary bear market to be signaled, the SP 500 (SPY) should violate its May 19^th secondary reaction closing lows (red horizontal line at the bottom of the chart). Additionally, either the Industrials or/and the Transports should also confirm and violate their respective secondary reaction closing lows.

Conversely, if the SP 500 (SPY) together with the Industrials and Transports (here Schannep demands triple confirmation) breaks above the primary bull market closing highs (blue horizontal lines) a primary bull market would be signaled. 

The blue and red horizontal lines are the relevant price levels the watch

Bottom line:

a)     If the SPY and/or the Industrials/Transports violate the red horizontal lines (secondary reaction closing lows), a primary bear market will be signaled (Schannep’s Dow Theory)

b)     If the Transports and the Industrials (with no SPY confirmation) violate the red horizontal lines (secondary reaction closing lows), a primary bear market will be signaled, as well (classical Dow Theory).

c)     If the SPY and the Industrials and the Transports break above the blue horizontal lines (primary bull market closing highs), the primary bull market will be reconfirmed (Schannep’s Dow Theory).

d)     If the Transports and the Industrials (with no SPY confirmation) break above the blue horizontal lines (primary bull market closing highs), the primary bull market will be reconfirmed (classical Dow Theory).

GOLD AND SILVER

The primary trend is bullish, as reported here and here.

The secondary trend is bearish (secondary reaction against the primary bull market), as explained here.

On June 9^th, SLV and GLD set up for a primary bear market signal, as explained here. Subsequent market action has not changed the current picture.

 GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here

The most recent decline experienced by SIL and GDX did not qualify as a secondary reaction. Recent confirmed higher highs have set the clock for a secondary reaction to zero (more about it here).

Sincerely,

The Dow Theorist