Stock markets forming a „line“: What does it mean under Dow Theory?

Follow up to the Dow Theory update for Oct 3

As I said earlier this evening I see that the SPY and the Industrials are forming a so called “line”. What’s a line?

I will use Rhea’s definition to understand what a “line” is under Dow Theory. According to him:

“A line is a price movement extending two or three weeks or longer, during which period the price variation of both averages move within a range of approximately five per cent”

“Lines” or trading ranges imply a period of accumulation or distribution. If the upper boundary is broken, it has a bullish implication of secondary character. If its lower boundary is violated, it has a bearish implication of secondary character.

The five per cent guideline doesn’t mean that the trading range must equal this amount; rather 5% is the limit. If this percentage is exceeded then we are dealing with a full-fledged secondary reaction against the primary trend. Thus, narrower trading ranges qualify as a “line” as well.

Here you have a chart displaying the lines. The blue rectangles on the Industrials and the SPY are the “lines”. 

Under Dow Theory the SPY and the Transports have formed a line

Rhea advised the Dow Theorist to keep an eye on volume inside the line. This is what I do:

Volume inside the line slightly bearish: Suggests distribution

Here you can find the detailed calculations:

 

	SPY	INDUSTRIALS	TRANSPORTS
High point	147.24	13596.93	5215.97
Low point	143.29	13413.51	4910.59
% from high to low	2.76%	1.37%	6.22%

So what are my conclusions under Dow Theory?

1.      It is clear that the Industrials and the SPY are forming a line. Such line is undisputed since it has been confirmed by two indices.

2.      The Transports are not forming a line since its movement exceeded 5%. 

3.      This line began 13 trading days ago, so it clearly fulfills Rhea’s duration requirements.

4.   In the last 13 days, we have had 7 bullish volume days and 6 bearish volume days (including a monster bearish volume day on 09/21/2012). However, in the last 9 days bearish volume has clearly prevailed.

Under Dow Theory, it is not possible to anticipate whether the upper boundary or lower boundary will be broken. Furthermore, it is inconsequential to us, followers of the primary trend. However, once it is broken we will be able to derive conclusions as to the likely intermediate trend of the market. Thus, if the lower boundary is violated, we will be able to announce that the market is experiencing a secondary reaction against the primary trend. Conversely, if the upper boundary is broken, then we will conclude that the secondary movement is bullish and confirming the primary bullish trend. 

And here you have the figures for the day:

Data for October 3, 2012
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/04/2012	128.1
Bull market signaled		06/29/2012	136.1
Last close		10/03/2012	145.09
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
6.61%	13.26%	6.25%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Last close		10/03/2012	172.41
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.39%	15.36%	7.41%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Last close		10/03/2012	33.51
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
15.87%	30.75%	12.84%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Last close		10/03/2012	24.72
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
13.24%	44.73%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Last close		10/03/2012	52.72
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
10.36%	33.27%	20.75%

Sincerely,

The Dow Theorist

Dow Theory update for Oct 3: Watch out the miners!

 Nonetheless, primary trend remains bullish 

 

 Today the S&P, Industrials and Transports all closed up. So it seems that the secondary reaction fails to materialize. However, I’m starting to discern a pattern that under Dow Theory has significance. The Industrials and the SPY seem to be forming a “line”. Later today or early tomorrow I will write more about “lines” and what they mean to the investor. I don’t want to rush now and make a bad job.

Volume was bullish today, since it was an up day on higher volume.

The BLV/GLD (long term bond/gold) ratio continues at a dangerous juncture but hasn’t displayed a bear signal yet (which would be bearish for bonds and bullish for gold).

Both gold and silver closed up for the day very near their recent lows. However, SIL and GDX (their miners ETFs) closed lower. Are the miners suggesting that the bull run in gold and silver is going to pause or even enter into a secondary reaction? We will see.  The significant lows to be broken in order to start to see some short term bearishness in the miners are those of 09/26/2012. I’ll keep an eye on them closely.

Later I will post the figures for today and my analysis of the “line” I see in the making and its repercussions for investors. 

Bottom line: The primary trend is solidly established. It is boring to be an investor along the primary trend. No actions; big gains.

Have a nice evening.

Sincerely,

The Dow Theorist

Dow Theory update for October 2: Mixed day. No news.

Today the Transports and the SPY closed up. The Industrials closed down. So we had a mixed day with no consequences. So there is nothing new under the Dow Theory.

Therefore, what I wrote earlier today “Dissecting a secondary reaction under Dow Theory” about the non existence of a secondary reaction remains valid and unchanged. You can find this post here

 

Volume was down and since overall I’d label the day as an “up” day (both the SPY and the Transports closed up), I’d say that we had a mitigated bearish volume day. So we have had 6 bearish volume days in the last 8 days.While always of secondary importance volume seems to be saying that the odds favor a secondary reaction soon.

As to the precious metals gold, silver and their respective miners ETFs closed down for the day. However, all the action occurred near the latest recorded highs and no technical damage has been made.

 Bottom line: Both the primary and even the secondary trend remain bullish.

As to bonds, it seems the world is not ready to end yet. The long term bond (BLV) /gold (GLD) ratio refuses to break down and give a primary bear signal. I keep monitoring this chart like a hawk. Here you have an updated chart. The green horizontal line is the significant level of the ratio to be violated in order to declare a bear market in bonds.

Bonds are not ready to collapse in spite of technical danger

  Here you have the figures for today:

Data for October 2, 2012

DOW THEORY PRIMARY TREND MONITOR SPY

SPY

Bull market started

06/04/2012

128.1

Bull market signaled

06/29/2012

136.1

Last close

10/02/2012

144.5

Current stop level: Bear mkt low

128.1

Unrlzd gain %

Tot advance since start bull mkt

Max Pot Loss %

6.17%

12.80%

6.25%

DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)

GLD

Bull market started

05/16/2012

149.46

Bull market signaled

08/22/2012

160.54

Last close

10/02/2012

172.1

Current stop level: Bear mkt low

149.46

Unrlzd gain %

Tot advance since start bull mkt

Max Pot Loss %

7.20%

15.15%

7.41%

DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)

SLV

Bull market started

06/28/2012

25.63

Bull market signaled

08/22/2012

28.92

Last close

10/02/2012

33.5

Current stop level: Bear mkt low

25.63

Unrlzd gain %

Tot advance since start bull mkt

Max Pot Loss %

15.84%

30.71%

12.84%

DOW THEORY PRIMARY TREND MONITOR ETF SIL

SIL

Bull market started

07/24/2012

17.08

Bull market signaled

09/04/2012

21.83

Last close

10/02/2012

25.01

Current stop level: Bear mkt low

17.08

Unrlzd gain %

Tot advance since start bull mkt

Max Pot Loss %

14.57%

46.43%

27.81%

DOW THEORY PRIMARY TREND MONITOR ETF GDX

GDX

Bull market started

05/16/2012

39.56

Bull market signaled

09/04/2012

47.77

Last close

10/02/2012

53.59

Current stop level: Bear mkt low

39.56

Unrlzd gain %

Tot advance since start bull mkt

Max Pot Loss %

12.18%

35.47%

20.75%

Dissecting a secondary reaction under Dow Theory

Result: No secondary reaction yet

As I promised yesterday, here you have an updated chart of the Industrials, Transports and the SPY and the implication to be derived from a Dow Theory standpoint.

As you can see, only the Transports have fulfilled the requirements for a secondary reaction to exist. The Industrials haven’t even corrected for 10 trading days (since its last highs were made on 09/20/2012. And the SPY although it has corrected for more than 10 days, it hasn’t even reached the critical 3% threshold for a downward movement to qualify as a secondary reaction.

However, one of the main tenets of the Dow Theory is that any movement (i.e. a secondary reaction) to be valid must be confirmed by two indices. This is not the case as of this writing and hence we have to conclude that the very light downward movement doesn’t even qualify as a secondary reaction.

This has two implications for investors:

a)      For latecomers the “sweet” entry point is not ready yet. If you don’t understand this sentence you should read this post  “What should I do if I missed the Dow Theory bull signals for the SPY and GLD? Dow Theory’s second chance: The first secondary reaction” which you can find here 

b)      For those already “in” we still cannot raise our trailing stops which continue fixed at the June 4 bear market lows. More on how to place stops under Dow Theory here 

Here the chart:

Under Dow Theory only the Transports are experiencing  secondary reaction unconfirmed by other indices

Here the details as to the relevant figures to appraise the existence of a secondary reaction:

 

SPY
Last primary leg primary movement up
LAST HIGH	147.24	09/14/2012
PRIOR LOW	128.1	06/04/2012
Amount primary	0.14941452
movement
Correction until Sep 28, 2012.
LAST HIGH	147.24	09/14/2012
Last low recorded	143.97	09/28/2012
pullback down	-0.02220864	doesn't qualify as a correction
total up leg	19.14	points
total correct	3.27	points
% secondary
corrected	0.17084639	far for retracing at least 1/3 of prior leg up
Industrials	Warning: Industrials haven't corrected for 10 days
Last primary leg primary movement up
LAST HIGH	13596.93	09/20/2012
PRIOR LOW	12101.46	06/04/2012
Amount primary	0.12357765
movement
Correction until Sep 28, 2012.
LAST HIGH	13596.93	09/14/2012
Last low recorded	13437.1	09/28/2012
pullback down	-0.01175486	doesn't qualify as a correction
total upleg	1495.47	points
total correct	159.83	points
% secondary
corrected	0.1068761	far for retracing at least 1/3 of prior leg up
Transports
Last primary leg primary movement up
LAST HIGH	5215.97	09/14/2012
PRIOR LOW	4847.73	06/04/2012
Amount primary	0.07596133
movement
Correction until Sep 28, 2012.
LAST HIGH	5215.97	09/14/2012
Last low recorded	4892.62	09/28/2012
pullback down	-0.0619923	Qualifies as a correction
total upleg	368.24	points
total correct	323.35	points
% secondary
corrected	0.87809581	It has retraced more than 1/3 qualifies as a correction

Sincerely,

The Dow Theorist

SIL/GDX ratio at new highs

If you look at the chart below you will see that the SIL/GDX ratio is at new highs. The highs 05/01/2012 were broken out last Sept 27. This is clearly bullish long term (i.e. 1-2 years) for the silver miners and confirms silver's relative strength. The trend of the ratio looks impressive.

From this chart I derive the following conclusions:

1. The world is not ending.

2. Hence, silver and its miners glitter more than gold. 

3. Risk "off" seems to be winning the upper hand.

4. This should also benefit stocks.

Here you have the chart. The red line is the ratio. If it goes up, SIL is stronger and GDX (in spite of its bullish trend) weaker.

SIL/GDX ratio breaks out previous highs: Clearly bullish long term

Sincerely,

The Dow Theorist

Dow Theory update for October 1: Markets up. No technical changes...yet

A secondary correction may happen any time now

On Friday, Sept 28, the stock market had been trending lower for the last 10 trading days (for the SPY and Transports). This is the minimum time requirement for a secondary reaction to exist.

However, for a secondary reaction to exist it is necessary that two of the three indices we monitor retrace at least 3% from their previous highs. In addition to the 3% retracement requirement, and while not carved in stone, it is advisable that 1/3 to 2/3 of the previous price advance be retraced.

If we look at last Friday’s Sep 29 closing prices we can see that only the Transports had experienced a retracement exceeding 3%, namely -6.19%, whereas the SPY and the transports didn’t reach the 3% threshold. Thus, under Dow Theory, although the time requirement for a secondary reaction was fulfilled, the 3% retracement in at least two indices was not met. Furthermore, the SPY only retraced 17% of the previous up leg (the upward movement from the bear market lows of June 4 to the highest high of Sep 14) which doesn’t qualify as a secondary reaction either. Same story applies to the Industrials. Well, by the Industrials we haven't even had 10 day trading day correction since the last highs were made on Sept 20.

Today’s market action hasn’t changed the picture we had last Friday at all, since the three stock indices closed up for the day, thereby making the retracement even smaller.

All in all, the Transports alone are in “secondary correction” mood. But under Dow Theory such movement unconfirmed by at least one of the other two indices is meaningless and even deceptive. I marked the word “deceptive” because the weaker Transports have many analysts confused and have them proclaim that no bull market exists.

If you still doubt about the existence of a primary bull market in stocks, you should read my post “5 Reasons why I consider the stock market in a primary bull market” which you can read here

All in all, the time requirement for a secondary reaction to exist has been met. However, this is not enough to proclaim the “advent” of a secondary reaction under Dow Theory. We have to see  in at least two indices a downward movement of at least 3%. Until this happens we cannot talk of a secondary reaction. However, it is clear that from now on I’ve to intently observe this market.

Tomorrow I will post an updated chart of the three indices where you will be able to visualize the yet to exist secondary reaction. Furthermore, I will provide you with all the relevant figures in order to appraise secondary corrections.

Today we had again a bearish volume day. The stock market closed up on lower volume. In the last 7 days, we have had 5 bearish volume days. Is this suggesting the eventually we will get the awaited secondary reaction? We will see. On the very short term I see in the charts that we have had 4 consecutive down days. According to legendary trader Victor Sperandeo this pattern suggests that the short term trend is nearing its end. I hope this time this pattern fails and that the bearish volume indications prevail, since, as followers of this blog know, I am eagerly awaiting a secondary reaction. More on this here and here.

Volume is bearish short term.

 

Gold, silver and their miners all closed up for the day. Gold and silver briefly broke out their respective highs but after staging an outside reversal day closed near the day’s lows. Such outside reversal days tend to denote short term tops. However, again, don’t get lost with the technical babble which I myself sometimes cannot avoid. Your focus is the primary trend. And this is solidly bullish for gold, silver and their miners. This should suffice to make of you a very successful investor.

Here are the figures of the markets I monitor for today:

 

Data for October 1, 2012
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/04/2012	128.1
Bull market signaled		06/29/2012	136.1
Last close		10/01/2012	144.35
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
6.06%	12.69%	6.25%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Last close		10/01/2012	172.29
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.32%	15.27%	7.41%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Last close		10/01/2012	33.65
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
16.36%	31.29%	12.84%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Last close		10/01/2012	25.05
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
14.75%	46.66%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Last close		10/01/2012	53.92
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
12.87%	36.30%	20.75%

Sincerely,

The Dow Theorist