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Manuel Blay
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Investor and Trader As investor I'm deeply influenced by Dow Theory. I focus on the primary trend (1-2 years). My trading is short-term based (avg trade duration 4-5 days).
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Dow Theory Investment
  • Dow Theory Update For Feb 6: Stocks Almost Unchanged  0 comments
    Feb 6, 2013 4:55 PM | about stocks: SPY, DIA, IYT, GDX, SLV, GLD, SIL
    Precious metals timidly up

    I read recently that Richard Russell, of the "Dow Theory Letters," needs to see the Industrials making all new time highs in order to unambiguously declare the primary trend bullish.

    With all due respect, I beg to disagree with Russell.

    Even under the Rhea/classical Dow Theory a primary bull market is not necessary signaled by the Industrials and Transports jointly making new all-time highs. If this were so, the markets would have never flashed a primary bull market signal in 1933 when mired in the depths of the Great Depression, since the all-time highs of 1929 were roughly 400% above the then-existing price levels. Such an extreme example serves to illustrate the futility of demanding new all-time highs for a primary bull market to exist.

    As I wrote in this post:

    For one index to confirm new highs or new lows made by other indices, it is not necessary that the confirming index increases or decreases by a similar amount percentagewise. Only the direction of the movement matters. In other words, if the Industrials make new highs after a 10% rally, it is not necessary for the Transports to rally 10% as well. A confirmation will be flashed provided that the underperforming Transports make new highs (even though such new highs represent a "mere" 6% rally). This explanation is at odds with a basic misunderstanding of the Dow Theory when, misguidedly, it is stressed that, i.e., "the June 2011 highs have to be bettered in order to confirm the bull signal of the Industrials". Monthly highs (or lows) are not carved in stone. What really matters is that (for a bull signal) following a primary bear market swing (leg) a secondary reaction follows, thereafter a pullback and finally a rally that breaks through the secondary reaction highs. The relevant highs to be broken are the latest secondary reaction highs, even though such highs may be significantly lower that the "highest" highs hitherto made. In other words, the "relevant" highs (lows) to be bettered (or broken) are self-adjusting with market action. Relevant secondary reaction highs (lows) that were not broken, cease to be representative when after a new primary swing down (up) follows a new secondary reaction, a pullback and a new rally.

    If I wrote this concerning the analysts' fixation with monthly highs and lows, it goes without saying that the preceding musings also apply to "all time" highs and lows.

    The investor is better served by knowing that under the classical Dow Theory, a primary bull market was signaled on January 18, 2013. You can find more details here. And for those followers of the Schannep's version of the Dow Theory a primary bull market was signaled on January 2, 2013 as you can read here.

    All in all, while we don't know what the future has in store for us, we do know that as per strict Dow Theory, the primary trend of the market is bullish. The coming of an already overdue correction doesn't negate the validity of this primary bull market signal. Nor would a failed signal, should the market reverse its course abruptly.

    Well, let's take a look at today's markets.

    The SPY and the Industrials closed up. The Transports closed down. The primary and secondary trend remains bullish.

    Today's volume was lower than yesterday's. Since the SPY closed up, I consider it a up day and thus volume is bearish as it is not confirming rising prices.

    Gold and silver closed up. However, technically, nothing has been accomplished. The primary and secondary trend remains bearish.

    GDX and SIL (the gold and silver miners ETFs) closed up. The primary and secondary trend remains bearish.

    Sincerely,

    The Dow Theorist

    Themes: Dow Theory Stocks: SPY, DIA, IYT, GDX, SLV, GLD, SIL
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