Dow Theory Update for February 7: Do we have a secondary reaction in US Stocks?

Schannep says yes. Heed his word.

I am bedridden with the flu. So I lack the energy to make lengthy considerations. I am writing before the close of February 7. So things might change (especially the +3% rally)

US STOCKS

The SPY (and the S&P 500) and the Industrials made their last recorded closing highs on Friday, January 26, 2018. The first day of decline was Monday, January 29, 2018. One of the requirements of Schannep’s Dow Theory for a secondary reaction to be declared is 10 calendar days of decline on at least two indices. The Transports have declined more than that. And what about the Industrials and the S&P 500? Well, here it is where it gets subjective.

My understanding of 10 calendar days of decline was that the “decline days” were to be counted as from the first day of decline. In other words, day “1” of decline was of course day number 1. If we counted calendar days from January 26, 2018 (which was the first day of decline) then the count of 10 calendar days would have been reached today, Wednesday, February 7^th. Since today’s close has not been the lowest point of the current pullback, no secondary reaction would be in place.

However, Schannep’s sees things otherwise. In his email to subscribers of February 6^th, Schannep considered the closing lows made on Monday, February 5^th as enough to declare the existence of a secondary reaction. Since it didn’t fit with what I thought was the right interpretation of the rules to declare a secondary reaction, I sent him an email. Being Jack the gentleman he is, I got an answer within minutes. Well, Jack Schannep takes a reference the last closing highs which were made on Friday January 26^th. Of course, this is not “day 1” of the decline. However, Schannep considers Saturday Jan 27^th and Sunday Jan 28^th as the two first days which are to be counted as start of the secondary reaction, which is also legitimate, as there cannot be “limbos”. Friday 26^th was “up”, Monday 29^th was “down”. The uptrend finished on Friday 26^th, and hence, the next two calendar days (Sat 27^th and Sunday 28^th) are already counted as part of the decline. Schannep’s rule for determining a secondary reaction reads exactly as follows:

“A secondary reaction which interrupts the primary trend must last a minimum 10 calendar days on 2 of the 3 indices with at least 8 trading days as the average of all three indices (Dow Jones Industrials, Transports, and the S&P500), which is equal to a minimum of 10 calendar days and sometimes 12 or 13 depending on weekends and holidays . The timeframe is shortened to half that for the first bounce following capitulation.

To qualify as a secondary reaction the price change must be at least 3% on two of the three indices.” (emphasis supplied)

Thus, what happened on Saturday 27^th and Sunday 28^th may be rightly considered an “interruption”. Of course, if on Monday 29^th we had had an “up” day, we would have forgotten the two calendar days of the weekend. However, Monday 29^th was a down day, and the two calendar days between such down day and Friday 26^th the last up day, are included by Schannep in the count leading to 10 calendar days.

This blog is not an ego trip. It merely serves to force become a better investor. And hence I am very willing to learn from the best (Schannep) in order to become more profitable in my own endeavors. Thus, I accept Schannep’s verdict: On Monday February 5^th, we had had 10 calendar days of “interrupting” prices in both the Industrials and the S&P 500. Furthermore, in the last few Letters to Subscribers, Schannep has been warning that the current bull market may be coming to an end. By the way, if you want to become a real good investor, subscribe to Schannep’s Newsletter. It really has no match.

The Transports have declined (until Monday, February 5^th) for 16 trading days, the Industrials and S&P 500 declined for 6 days, which makes an average of 9.33 days, which also fulfills Schannep’s 8 trading days rule.

As to the extent requirement it has been amply fulfilled (-7.9% for the SPY). By the way, if the exit signal were to be some -8% from the top, this would be a very “normal” exit. The only thing that can kills us dowtheorists (and any other market participant too) is a sudden opening gap of, let’s say, -15%. This would be ugly. What we saw yesterday is immaterial.

So from now on, we have to wait until at least one index rallies more than 3% off the February 5^th closing lows (The Industrials seems to do so today, but we have to wait until the close). Once, this happens, will get the setup for a primary bear market signal.

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

The primary trend was reconfirmed on July 3^rd, 2017 as was explained here

Here you have an updated chart. The orange rectangle depicts the current decline.

 

The beginning of the end of a primary bull market?

GOLD AND SILVER

In spite of all the turbulences that seem to afflict markets. The precious metals have not even changed their secondary trends.

The primary trend was declared bearish on July 7^th, 2017, as explained here and here

The secondary trend is bullish, as was profusely explained here.

The pullback that got started on September 8^th, 2017 has unambiguously setup SLV and GLD for a primary bull market. A quite different issue is whether the signal will be ever given.  An in-depth explanation here. Please mind that a “setup” is not the actual signal. SLV made lower lows (of no technical significance under the Dow Theory, though, since it was not confirmed by GLD). For the time being, the primary bear market lows have not been jointly revisited and hence the primary bear market has not been reconfirmed. The longer the non-confirmation persists, the more likely that the primary bear market could be nearing its end. However, we wait until we get a real signal.

GOLD AND SILVER MINERS EFTs

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

The secondary trend is bullish as explained here

For the same reasons given when analyzing SLV and GLD, no primary bull market has been signaled for SIL and GDX, as explained here. GDX did not better its secondary reaction closing highs by a hair, but it failed to do so. Furthermore, SIL was very far from its secondary reaction closing highs.

On 11/10/2017 SIL violated its primary bear market closing lows (red arrow on the right side of the chart). GDX has not confirmed. Lack of confirmation implies that the primary bear market has not been reconfirmed, and, as with GLD and SLV,  the longer it takes for GDX to confirm the higher the likelihood that the primary bear market may be nearing its end.

Therefore, the current situation remains unchanged. We have a primary bear market signaled on 10/04/2016 (more than one year old, another candle to light). There is an ongoing secondary reaction against the primary bear market and a setup for a primary bull market.

Sincerely,

The Dow Theorist