Dow Theory Update for May 4: Last April 24th US stocks set up for a primary bear market signal

Silver and Gold close to signaling secondary reaction

I am writing early in the morning before the open of May 4^th.

I apologize for not writing more often. My mother’s health remains extremely fragile, and hence most of my time is being devoted to taking care of her. However, I look at the charts every day and remain fully aware of trends and their evolution. 

However, today I am going to catch up with my market analysis, as this is going to be a long post. 

US STOCKS

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

The secondary trend is bearish (secondary reaction against the primary bull market). The secondary reaction was signaled on April 13^th, as explained here.

As per Schannep’s Dow Theory in order to complete a primary bear market setup, at least one index should rally more than 3% off the secondary reaction closing lows. As of this writing only the Transports have done so. The Transports secondary reaction closing lows were made on April 13^th, 2017 (closing price 8874.56). On April 24^th the Transports closed at 9282.99, which is a rally of +4.60%, thus exceeding the minimum 3% requirement.

Neither the Industrials nor the S&P 500 have rallied more than 3%. However, it suffices just one index to setup stocks for a primary bear market. Please mind that the principle of confirmation does not apply when it comes to the rally/pullback that sets up stocks for a primary bear/bull market signal. More about the nuances concerning the principle of confirmation here.

So now we have two alternative scenarios:

a) Either the three indices break above the March 1^st, 2017 closing highs (last recorded primary bull market highs), and the primary bull market gets reconfirmed.

b) Or, the S&P 500 together with other index (either the Transports or the Industrials) break down the secondary reaction lows (made on April 13^th for the SP 500 and Transports, and on April 19^th for the Industrials), in which case a primary bear market would be signaled. Why the S&P500 must always be present for a primary bear market signal to be signaled? The in-depth answer here.

As an aside, and barring a catastrophic gap down, it is highly likely that the ongoing trade will be a winner. Why? The entry price for the SPY was at 220.15 (date November 21^st, 2016). The exit price would be in the vicinity of 232.51 (April 13^th, secondary reaction closing lows), which amounts percentagewise to a profit of 5.61%. Please mind that Jack and Bart Schannep themselves have larger unrealized gains as they did not heed the primary bear market signal of November 3^rd, 2016 which was a whipsaw (more about such a signal here and more about the reasons which prompted Jack and Bart Schannep to disregard such a signal here), and hence they entered the Dow Theory trade on August 11^th, 2016 holding fast by that buy signal until now.

Any reader really intent on learning about market timing is kindly advised to read the three links I have just given. There you will see two different and legitimate perspectives and thoughts about how to pull the trigger on real time. One thing is to read about markets “ex post facto” (after the facts), another quite different thing is to take decisions in real time with real money on the table.

Here you have an updated chart. The red rectangles display the secondary reaction against the primary bull market whereas the blue small rectangle displays the +4.60% rally of the Transports that set up US stocks for the primary bear market signal.

If the red horizontal lines got violated by the SPY (bottom) and at least one other index, a primary bear market would be ignaled

  

So now we have to see and wait. 

And what about the trends as per the Rhea/Classical Dow Theory? The primary trend is  bullish, irrespective of the way one interprets it. 

As to the secondary trend, depending on the way we interpret the classical Dow Theory, we can draw two different conclusions. If we do away with the 1/3 retracement requirement (something dear to strict classical Dow Theorists) and we just require a -3% confirmed decline (both the Industrials and Transports), then stocks are under a secondary reaction, as they have declined for more than 3 weeks, since the March 1st closing highs (larger time requirement for a secondary reaction to exist under the classical Dow Theory). In other words, if we are content with just a -3% confirmed decline both the extent and the time requirement have been met. This is the why Jack and Bart Schannep rightly consider the secondary trend as bearish, which I display in the chart below.

However, if we go “strict” classical and demand not only three confirmed weeks of declines but also a confirmed retracement of at least 1/3 (or very close to it), there is no talk of secondary reaction yet. A secondary reaction should undercut 1/3 of the last primary bull market swing. The ongoing primary bull market swing started at the lows of June 27^th, 2016. As per the classical/Rhea Dow Theory this is where the current bull market swing got started. Please mind that according to the classical Dow Theory (no matter which of the three alternative interpretations you use, as was analyzed here, here and here), the last primary bear market lows were made on June 27^th, 2016.

Since, June 27^th, 2016 there has been no secondary reaction interrupting the primary bull market swing, and hence, the 1/3 price retracement is to be measured from the June 27^th, 2016 closing lows. TradeStation ® has the ability to plot retracements on the charts, and, hence, as you can see in the charts below, the current price decline from the March 1^st, 2017 closing highs is far from achieving a 1/3 retracement . The Industrials have roughly retraced 20% of the whole bullish swing, whereas the Transports have roughly retraced 25% of such a swing. Under such circumstances, no secondary reaction is in place and hence the secondary trend remains bullish. Please mind that this is not exact science and that Rhea himself explains in his book that there is not a foolproof way to appraising secondary reactions. This is why I personally gravitate towards Schannep’s Dow Theory, as it provides me with a good deal of certainty when applying the Dow Theory. Subjectivity has been kept as much as possible at bay.

Here you have the charts:

A bullish swing which is almost 11 months old. Current decline has not managed to retrace 1/3 thereof.

GOLD AND SILVER

The primary trend turned bullish on April 12^th, 2017 as explained here

The secondary trend is bullish too, albeit SLV and GLD have been declining for 14 trading days, which puts them very near to fulfilling the time requirement for a secondary reaction. Bellow you'll find the charts displaying the precipitous decline of SLV and the more moderate one of GLD, which nonetheless has not changed either the primary or secondary trend.

As an aside, it is worth mentioning that the primary trend when using weekly bars is bearish, which tends to be headwind for any meaningful bullish action. Furthermore, the gold and silver miners ETFs remain in a primary bear market, unless a bullish confirmation comes soon, I see even more headwind.

GOLD AND SILVER MINERS EFTs

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

The secondary trend is bullish as explained here

As was explained here, SIL and GDX have set up for a primary bull market signal. Here you have an updated chart.

No primary bull market signal in sight

 

If the last recorded primary bear market lows were jointly revisited, the primary bear market would be reconfirmed.

As an aside, it is worth mentioning that the primary trend when using weekly bars is bearish, which tends to be headwind for any meaningful bullish action.

Sincerely,

The Dow Theorist