Monday, February 27, 2017

Dow Theory Update for February 27: Some thoughts about the current long trade in US stocks

Trends unchanged

The primary and secondary trend is bullish since November 21st, 2016, as explained here and here.

On February 15, the Industrials, Transports and SPY (SP 500) jointly made higher highs. Today, the SPY and the Industrials jointly made higher highs. Ergo, both the primary and secondary trend remains bullish.

Rhea wrote that from higher highs secondary reaction can develop swiftly. In other words, when stocks make higher highs, they usually are overbought which makes them susceptible to corrections.

Thus, I’d like to explore what would likely happen in case US stock indices were to develop a secondary reaction from the current highs, which later might turn out to be a primary bear signal.

As I wrote here, Schannep calculated that “sell” signals (primary bear market signals) on average start within 7.7% of the tops.

The SPY closed today at 237.11. If this level were the top, then our exit (primary bear market signal) would be at ca. 7.7% the current price. This implies a SPY level of 218.85.

Our entry was at 220.15 (close of November 21st, 2016). Thus, if our hypothetical exit were an “average one”, we would exit this trade with very modest losses (exit at 218.85 versus entry at 220.15).

Of course, I am not talking certainties. First of all, maybe (and hopefully) we have not seen the top of this primary bull market yet. Secondly, if we had just seen the top, the exit could be at a lower level than 7.7%.  Or maybe less. Nobody knows. What I know, though, is that at the current price of 237.11 and with an entry price of 220.15 for the SPY, the odds favor modest losses on this trade or even modest gains should the current primary bull market be stopped on his tracks right now. In other words, while anything is possible (i.e. sudden crash of -20% overnight), it is unlikely that this trade turns out to be a big loser (i.e. losing more than -7%).


The primary trend is bearish, as was explained here and here. The primary bear market was signaled on September 30rd, 2016.

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


The primary trend is bearish, as was explained here and here.

The secondary trend is bullish as explained here

SIL and GDX have been flirting with a primary bull market signal, as explained here. However, recent price action makes such a signal more unlikely in the coming days.

The Dow Theorist

No comments:

Post a Comment