And setting the record straight
I am writing before the open.
Misconception 2:
Lack of confirmation suffices to change a trend
A recent article post on Zero Hedge with the bombastic
title “The One Key Indicator Pointing To A Bear Market” makes two errors.
The first one is to assume that the market is still
under a primary bull market. It seems that the author is out of gear with the
primary trend, as the market turned bearish already on June 24th, as
it was explained here.
Furthermore, the primary trend was signaled by both
the “classic” Dow Theory (just two indices and stricter time requirement to
declare a secondary reactions) and Schannep’s Dow Theory. Thus, there is no
excuse for ascertaining the primary trend.
The second error, which is the second misconception I want to address, is to consider that the bull market
(assuming for the sake of argument there is still one, which is not the case) may
be about to change due to the current Transports lack of confirmation. Even if
one’s interpretation of the Dow Theory may lead the practitioner to believe the
primary trend remains bullish, I must say that higher highs (or lows) not
confirmed do not suffice to change any trend.
Lack of confirmation merely
implies that the trend which is not being confirmed becomes suspect. Thus, if we (wrongly) assume that the primary trend
is bullish, lack of confirmation merely means that it may (“may” not “must”)
lead to a secondary reaction. Of course, by luck, it can also lead eventually to a primary
change of trend. However, in real time, nobody knows whether it will lead to a
change of the primary trend; at best, lack of confirmation increases the odds for a
secondary reaction. It is true that Rhea wrote that the principle of
confirmation is more important at critical junctures (i.e. when a primary
bull/bear market may be about to change). However, it takes more than a lack of
confirmation of the primary thrust to change a primary trend
from bullish to bearish and vice versa. We need a counter movement and the breaking
out (now confirmed) of the relevant closing highs or lows. Which are the “relevant”
closing highs or lows? There are only three relevant highs or lows, as it was explained
in the previous post. Any other highs or lows which you may read or be applied
elsewhere is humbug. More about them
here:
The takeaway under the current market juncture is as
follows: The primary trend is bearish. Higher closing highs (breakout of the
primary bull market highs of April 20) by the Industrials unconfirmed by the Transports,
merely implies:
a) The Trend has not changed to bullish due to the
lack of confirmation.
b) The secondary trend (the bullish secondary reaction
against the primary bear market) may be running out of steam. The longer it
takes for the Transports to confirm the more likely for the primary bearish
trend to reaffirm itself, and hence more likely for us to see a new primary bear market swing..
The two misconceptions I have mentioned in these two
posts lead many Dow Theorists astray. Half-truths badly digested are likely to
be misleading.
US STOCKS
The primary trend turned bearish on June 24th,
as was profusely explained here.
The secondary trend is bullish (secondary reaction
against the primary trend), as all three indices (Industrials, Transports and
SP 500) have been rallying for more than 8 trading days (average of the three
indices) and each of them has rallied more than three percent. As of this
writing we don’t know whether we can declare the end of the secondary reaction,
as no index has pulled back more than 3%.
As I explained here, if the Transports were to break out above their April
20th closing highs (primary bull market highs), a primary bull
market would be signaled. The longer it takes for the Transports to confirm the
SP 500 and Industrials higher highs, the more likely a decline is in the
making.
GOLD AND SILVER
The secondary trend is also bullish as explained here
Recent declines
do not fulfill the time requirement for a secondary reaction yet (or never).
Given that the time requirement for a secondary reaction has not been met, I
don't bother with calculation the "extent" requirement, as I need
both to declare the existence of a secondary reaction.
GOLD AND SILVER
MINERS ETFs
Recent declines
do not fulfill the time requirement for a secondary reaction yet (or never).
Given that the time requirement for a secondary reaction has not been met, I
don't bother with calculation the "extent" requirement, as I need
both to declare the existence of a secondary reaction.
Sincerely,
The Dow Theorist
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