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Dow Theory Update For Feb 19: Stocks Up. No Change In Trends

|Includes:DIA, GDX, GLD, IYT, SIL, SLV, SPDR S&P 500 Trust ETF (SPY)

GLD may be closed to making a bottom, in spite of today's weakness.

Lars Schall has just posted on his website an insightful interview to David P. Goldman where issues such as gold, TIPS and ordinary bonds, and the End game, namely, inflation in USA and wealth confiscation (though punitive wealth taxes) in Europe are discussed. It is must-read for those interested in a proper fundamental view and, on a general basis, in protecting wealth.

Readers of this Dow Theory blog may be asking why I am providing the link of a piece of fundamental research. Am I not the quintessential technician? Yes, I am a die-in-the-woods technician when it comes to investing and analyzing the markets in a time frame not exceeding two years. However, the longer the time horizon, the more important fundamental analysis becomes and hence the need to have (even at the risk of being wrong) a fundamental view. Of course, one solution is to ignore fundamental analysis altogether and focus all investments in the shorter 2 years time frame by going only technical. Such a decision depends upon many factors:

a) The psychological makeup of the investor (some investors despise the idea of being technical based on core beliefs, etc.)

b) The confidence in his technical skills (and lack of confidence in his fundamental skills).

c) The amount of money he expects to make by going technical (and hence shorter term oriented) versus going fundamental.

However, I feel a "fundamental" view is relevant even for technical hardliners. What good is technical analysis or the Dow Theory if, as it is suggested in the interview, your wealth risks being wiped out be it through inflation (USD solution to debt problems) or through punitive wealth taxes that amount to confiscation (EUR solution).

Thus, the Dow Theory is not lying in a vacuum. The Dow Theory and technical analysis are just a means (a very good one, in my opinion) to protect wealth in tough times and gain a modest outperformance of ca. 2%. However, the technical investor should pay attention to much broader issues such as inflation, punitive taxes, the role of gold, etc.

Nobody said that surviving as an investor is an easy feat. The first, albeit not ultimate, building block is not to screw up in your trading/investing. And to this end, the Dow Theory is a very useful tool as I have explained with hard figures here and here.

However, being a successful Dow Theorist is just the beginning (even though many fail at this preliminary step). Once you are competent investors, you have to focus on the much broader issue: Are there any threats to the wealth you have acquired by trading skillfully the markets? Is high inflation in the making? Or a killing deflation? Is government getting ready to tax you to death? May gold play a role in protecting you against such risks? If yes, what kind of gold? Is all gold is created equal? A thoughtful investor, should pay attention to all these risks and act accordingly.

Well, let's turn our eyes to the markets.

The SPY, Transports and Industrials closed up and by closing up, they made higher highs. Of course, this is bullish action, since we are seeing new highs confirmed by the three indices we monitor.

Volume was higher than yesterday's volume. Since the upward movement has not been confirmed by volume, it has a bearish connotation.

Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) closed down. The primary and secondary trend remains bearish. However, GLD has experienced a serious outflow of assets. According to the so-called "puke indicator," we may be nearing a bottom in gold. More about the puke indicator here.

GDX (gold miners ETF) and SIL (silver miners ETF) closed down. The primary and secondary trend remains bearish.


The Dow Theorist