Dow Theory Investment

Thursday, June 1, 2017

Dow Theory Update for June 1st: The Industrials make higher closing highs and confirm the S&P 500

However, the Transports refuse to do so

US STOCKS

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

Today the Industrials closed at 21144.18 that is above their March 1^st closing highs of 21115.55. And thus confirming the S&P 500 breakout of May 10^th.

However, the Transports are lagging behind, and hence they are not confirming.

What should be our reading?

As per the “Rhea/Classical” Dow Theory, the conclusion is clear. If we assume the existence of a secondary reaction (as per Schannep’s interpretation of the classical Dow Theory), then nothing has happened as the Transports have not confirmed. Thus, the secondary (bearish) reaction against the primary bull market has not been extinguished yet, and hence, the violation of the 4/13/2017 closing lows (Transports) and 4/19/2017 closing lows (Industrials) would entail a primary bear market signal.

An alternative legitimate interpretation of the “Rhea/classical” Dow Theory is that no secondary reaction has been signaled yet, as the last primary bull market swing has not been retraced on a confirmed basis by more than 1/3 by both the Industrials and the Transports. The entrails and chart of this interpretation are to be found here.

According to this interpretation, given the absence of a secondary reaction, higher highs not confirmed by the Transports merely mean that the longer the non-confirmation persist, the more likely a setback (which may be of just secondary proportions, that is a humble secondary reaction, is likely to set in). Since we don’t have secondary reaction lows (as there isn’t any), the violation of the 4/13/2017 closing lows (Transports) and 4/19/2017 closing lows (Industrials) would not entail a primary bear market signal. A decline extending those lows would merely imply a retracement of more than 1/3 of the primary bull market swing which would constitute a secondary reaction. Thus, as per this alternative interpretation of the classical Dow Theory, we are miles away from a primary bear market setup. We just have a primary bull market swing, which would become suspect, in case non confirmation persists.

Please mind that I am agnostic as to which interpretation of the Rhea/classical Dow Theory is better. “Better” is not a good word when it comes to analyzing markets. Personally, I live and die by Schannep’s Dow Theory, which is even better than Schannep’s interpretation of the Classical Dow Theory, which may be better than the Classical Dow Theory (please mind the nuances).

Here you have an updated chart. The orange rectangles display the secondary reaction as per Schannep’s interpretation of the Classical Dow Theory. The blue rectangle display the +3% rally underwent by the Transports which set up stocks for a primary bear market signal. As you can see, the Industrials (top chart) have broken up the blue horizontal line (bull market highs of March 1^st) on an unconfirmed basis, whereas the Transports violated the red horizontal line (secondary reaction closing lows) without confirmation either. Thus “tie”. One bullish reading versus one bearish reading.

As per the "Classical" Dow Theory as interpreted by Schannep nothing has happened. Just a secondary reaction.

As per Schannep’s Dow Theory, to be in the “clear”, we need that the three indices break up their primary bull market closing highs of March 1^st, 2017. Only when this happens, we can “reset” our secondary reaction “counter”, and thus consider the secondary reaction as finished, and count a new primary bull market swing. Therefore, the secondary trend is bearish (secondary reaction against the primary bull market). The secondary reaction was signaled on April 13^th, as explained here. Please mind that I lend more credence to Schannep's Dow Theory than to the Classical Dow Theory (in spite of its being very good too). Why Schannep's Dow Theory is superior to the Classical (no matter the way one interprets it), here.

Here you have an updated chart.

To declare the ongoing seconary reaction als dead, the Transports must break up the March 1st highs

GOLD AND SILVER

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

The secondary trend is bearish, as explained in depth here.

Given the recent rally off the secondary reaction closing lows, I feel the setup for a primary bear market signal has been completed. Here you have a chart. The orange rectangles display the secondary (bearish) reaction against the primary bull market, whereas the blue rectangles display the rally off the secondary reaction closing lows which have setup SLV and GLD for a primary bear market signal. Please mind, that setup does not necessarily imply the bear signal. Either the primary bull market highs get jointly broken up in which case the primary bull market would be confirmed, or the jointly violate the secondary reaction lows, which would imply a primary bear market signal.

Here you have an updated chart

Silver and Gold at crossroads: Either new bear market or primary bull market reconfirmed

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.

Sincerely,

The Dow Theorist

Wednesday, May 17, 2017

Dow Theory Update for May 17: US stocks refuse to confirm neither bull nor bear signal

End result: No change of primary trend.

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. The Transports and the S&P 500 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.

The S&P 500 secondary reaction closing lows were made on April 13^th, 2017 (closing price 2328.95). On May 10^th, the S&P 500 closed at 2399.63, breaking out above its last recorded primary bull market closing high of March 1^st, which amounts to a rally of 3.03% (which is more than 3%). The SPY, likewise, bettered its March 1^st closing highs on May 15^th, 2017 (blue upward arrow on the bottom chart).

By the way, the S&P 500 higher closing high has not been confirmed by neither the Industrials nor the Transports. Please mind that the SPY is not “confirming” the S&P 500, as we are talking of the same index. Hence, the S&P 500 higher highs have not been confirmed.

Thus, we cannot declare the secondary reaction as extinguished. Furthermore, the longer the lack of confirmation by the Transports and Industrials persists, the more suspect the current rally off the April 13^th, 2017 closing lows becomes.

Today, May 17^th, the Transports have violated their April 13^th, 2017 secondary reaction closing lows (red downward arrow in the middle chart). Under the “Rhea/classical” Dow Theory, for a primary bear market signal to exist, it is necessary that the Industrials confirm. They have not done so. Please mind that under the "Classical/Rhea" Dow Theory as interpreted by Schannep, there is a secondary reaction going on, and hence, a primary bear market signal would be signaled if the Industrials were to violate the April 13th secondary reaction lows (even if the S&P 500 were not going to do so). However, strict "classical" Dow Theorists might not see a secondary reaction yet, as was explained here.

Here you have an updated chart:

The primary trend remains bullish until reversed

Under Schannep’s Dow Theory, for a primary bear market to be signaled, we need the S&P 500 to confirm, namely, to violate its April 13^th secondary reaction closing lows. As the S&P 500 has not done so, the primary trend remains bullish. Why under Schannep’s Dow Theory should the S&P 500 always be part and parcel of any signal? The answer here

Bottom line: We are seeing lack of confirmation when it comes to higher highs, which negates the end of the current secondary reaction. On the other hand, we have just seen today lack of confirmation when it comes to lower lows, which negates the primary bear market signal. However, until a signal is reversed by a new one, the trend remains unchanged, and hence the primary trend remains bullish.