Trends unchanged for US stocks
Today is a post that took a good deal of analysis and time to write. Take your time to fully digest it.
US STOCKS
A primary bear market for
US stocks was signaled on August 14th, 2019 as explained here.
A secondary reaction
against the primary bear market was signaled on August 30, as explained here.
The setup for a primary bull market (rally after the
secondary reaction) was completed on 09/19/2019 as was explained here
From 09/19/2019 US stock indices have been hesitant
neither the secondary reaction closing highs nor the last lows of the primary
bear market have been broken. All in all, we have to wait, and in the meantime
the primary trend as per Schannep’s Dow Theory remains bearish.
Here you have an updated chart:
As to the Rhea/Classical Dow Theory there are no
changes. The primary trend remains bullish (as explained here)
The secondary
trend is bearish, as we remain in the midst of a
secondary (bearish) reaction against that primary bullish trend. The
Industrials made higher closing highs bettering their secondary reaction highs
unconfirmed by the Transports and, hence, the primary bull market was not reconfirmed and the secondary
reaction was not extinguished. On
August 23rd, 2019 the Transports violated their secondary reaction
closing lows unconfirmed by the
Industrials, and accordingly no primary bear market has been signaled. So
the trend of the stocks when appraised under the Classical Dow Theory remains
bullish but inconclusive. Lack of confirmation by the Transports prevented both
the reconfirming of the primary bull market and the signaling of a primary bear
market.
The charts below display
the current situation under the “Rhea/Classical” Dow Theory
GOLD AND SILVER
The primary trend is
bullish since 12/24/2018 as explained here. No changes. We finally got a secondary
reaction on 4/16/2019 when GLD violated its 03/07/2019 closing lows (and
confirmed SLV which had done so some days ago). More about the entrails of such
a secondary reaction here and here.
On 09/04/2019 SLV and GLD made its last recorded
primary bull market closing highs. From that date both ETFs declined for 18
trading days until 09/30/2019. Since 18 trading days clearly exceeds two or
three weeks, the time requirement for a
secondary reaction was met.
And what about the extent requirement? Well, things are not so clear-cut. As to SLV it
has retraced 50% of the previous bull market swing. Please mind that a bull
market swing is not the same as the whole primary bull market. Each “swing” is
the price advance that starts at the bottom of each secondary reaction which is
finally resolved in favor of the primary bullish trend. In our case, our “swing”
got started on 05/28/2019 (SLV) and 04/23/2019 (GLD). GLD has not managed to
retrace 1/3 of the previous swing. My Fibonacci calculator (courtesy of
TradeStation®) tells me that the retracement has been of 29.80%, thus falling
short of 33%. As per the classical Dow Theory, we are supposed to
require a retracement of at least 1/3 on a confirmed basis to declare the
extent requirement for a secondary reaction as fulfilled. However, we are in a
borderline situation.
As you well know, as per Schannep’s Dow Theory, we don’t
require retracement but (for US stock indices) a minimum move of at least 3% on
a confirmed basis. As you also know, when I apply the tenets of Schannep’s Dow
Theory outside the realm of stocks, I perform volatility adjustments; namely,
if, i.e. gold’s volatility doubles that of the S&P 500 over a set period of
time (i.e. 30, 100 days), I will demand 3% (the minimum movement for stocks)
multiplied per 2. On 09/30/2019 date of the putative secondary reaction closing
lows the 100 day volatility adjusted minimum movement for GLD was 3.38%. On the
other hand, the total decline from the 09/04/2019 closing highs to the
09/30/2019 closing lows was -5.31%. All in all, the extent requirement, if we
are to apply the Schannep’s rules to GLD would have been also fulfilled.
Furthermore, we have to bear in mind that the time requirement was amply met. The more I practice the Dow Theory,
the more I begin to understand Rhea’s cryptic statements as to toying with
extent and time (page 61 of “The Dow Theory” Fraser Edition 1993). My gut
feeling tentatively suggests me the following rule of thumb:
The more “time” I have, the less strict I should be
with the “extent” requirement and vice versa.
I am not saying that If I have plenty of “time” (i.e.
5 weeks of declining prices) I can do away with the extent requirement (although there is one trader that suggested doing so).
However, I feel that the more established has been a pullback, the lesser
strict I can be when gauging the extent
requirement. In our case, 18 trading days is a reasonably sufficient length of
declining prices, and hence, I can be somewhat flexible as to the extent
requirement. In our case, SLV has retraced more than 50% of the previous bull
swing, which, by the way, tends to reaffirm that we are dealing with more than
a subtle decline. GLD has retraced ca. 29.8% which is not so far from 1/3 (and
hence confirming). If we evaluate GLD’s under the prism of volatility (as
Schannep does with stocks) the pullback for GLD has exceeded the minimum
volatility-adjusted threshold.
All in all, I make a judgment call, and I consider the
extent requirement for the existence
of a secondary reaction as fulfilled and hence, for my trading purposes, I
consider SLV and GLD under a secondary reaction
From the secondary reaction closing lows of 09/30/2019,
SLV rallied until 10/08/2019. GLD did so until 10/09/2019. Hence, the time
requirement (at least two bars) to set up SLV and GLD for a primary bear market
was also fulfilled (small blue rectangles on the right side of the charts
below). Now we have to measure the extent
of such a rally. If at least one ETF has rallied more than the minimum
volatility-adjusted movement, we will declare the existence of the setup.
As shown in the spreadsheet below, SLV has rallied
4.33% whereas the minimum volatility-adjusted movement (at date 10/08/2019,
date of the rally high) amounts to 5.28%. Hence, SLV has not fulfilled the minimum
movement requirement.
And what about GLD? GLD has rallied a meager 2.28%
which is also below the minimum volatility-adjusted movement (at date 10/09/2019,
date of the rally high) amounts to 2.97 %. Hence, GLD has not fulfilled the minimum
movement requirement either.
All in all, we have a secondary reaction but the setup
for a primary bear market signal has not been completed. Hence new declines
below the hitherto recorded secondary reaction lows would not entail a primary
bear market signal but merely would mean new secondary reaction lows (hence a
larger secondary reaction both in time and extent).
Here you have an updated chart
 |
| Secondary reaction (orange rectangles on the right side) and a rally (blue rectangles) which did not result in setup |
GOLD AND SILVER MINERS ETFs
The primary trend is
bullish since 12/18/2018 as explained here. No changes.
On 09/04/2019 SIL and GDX made its last recorded
primary bull market closing highs. From that date both ETFs declined for 18
trading days until 09/30/2019. Since 18 trading days clearly exceeds two or
three weeks, the time requirement for a
secondary reaction was met.
The extent
requirement has been met too. Both ETFs have retraced ca. 38% of the previous
bull swing. Hence, more than 1/3 has been retraced on a confirmed basis, and
the extent requirement has been met too. No need to further dig.
As to the rally that followed the secondary reaction
lows of 09/30/2019, neither ETF has fulfilled the minimum volatility-adjusted
movement, as you can see on the spreadsheet below.
Hence, no setup for a primary bear market has been
completed.
All in all, we have a secondary reaction but the setup
for a primary bear market signal has not been completed. Hence new declines
below the hitherto recorded secondary reaction lows would not entail a primary
bear market signal but merely would mean new secondary reaction lows (hence a
larger secondary reaction both in time and extent).
Here you have an updated chart
 |
| Orange rectangles on the right side of the chart display secondary reaction. No setup for bear market yet |
Sincerely,
The Dow Theorist
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