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Manuel Blay
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Trader and investor. My trading is short-term based (avg trade duration 4-5 days). As investor I'm deeply influenced by Dow Theory
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Dow Theory Investment
  • Dow Theory Update For Feb 22: Precious Metals And Stocks Up  7 comments
    Feb 22, 2013 5:01 PM | about stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL

    Are precious metals finding support?

    Let's get started with our Dow Theory commentary in this blog.

    Strebler joins forces with Russell.

    I have some news from the Dow Theory world. Richard Russell, of the "Dow Theory Letters," has a new business associate to help him run his advisory. Jon Strebler has already written two interesting pieces (which are only available to subscribers). I feel this can be a fruitful cooperation. From what I gather, Strebler is slightly more bullish than Russell. His long term bullishness also applies to gold.

    Special note on gold

    GLD lost yesterday (Feb 21) an additional 9 tonnes of gold. In a new comment left at FOFOA's blog, according to Victor the Cleaner (of whom we spoke yesterday), such inventory loss strengthens the odds of a bottom being in the making. I'm going to go out on a limb, but I feel two extreme outcomes are at hand: Either GLD pretty soon starts to go up strongly or if in spite of the inventory drain, it continues going down, something nasty may happen (which might signify a seizure of paper gold markets). Of course, all this talk is not Dow Theory, and traders in paper gold shouldn't give a hoot about it. However, those investors in physical gold and, in general, any investor concerned with the health of the financial markets should keep an eye on GLD's inventory changes and its relationship with the price of gold.


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

    Today's volume was lower than yesterday's. Thus, it was a bearish volume day, as ascending prices were not supported by increasing volume. This is the fifth bearish volume day in a row, which lends credibility to the idea that more weakness is likely to be seen in the days ahead. The analysis of volume I conducted yesterday remains not only fully in force but gets reinforced by today's volume. Here you have an updated chart that speaks for itself:



    (click to enlarge)
    Volume is hinting that more bearish action is to be expeceted in the days ahead

    Gold and silver

    Gold and silver (GLD and SLV) closed up. Leaving aside my musings concerning the "puke" indicator, one thing is clear: For GLD and SLV the primary and secondary trend remains bearish.

    GDX (the gold ETF miner) closed down, its silver peer SIL closed up. The primary and secondary trend remains bearish.

    Special issue concerning the 1982-1999 secular bull market

    If time allows me, I plan to post during this weekend a special Dow Theory issue concerning the Dow Theory performance during the 1982-1999 secular bull market (prior studies here and here). Readers of this blog, stay tuned.


    The Dow Theorist

    Stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL
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  • New Low Observer
    , contributor
    Comments (2543) | Send Message
    Greetings Manuel,


    Your contribution on the topic of Dow Theory is very interesting and we read all of the postings that you submit.


    What is your take on the performance of the calls of the primary trend that you've provided in your articles and the opposite performance of the stock market?


    As an example, below are the dates that have Dow Theory primary trend calls from beginning to end.


    * According to your Dow Theory analysis, stocks were in a primary bear market from 11/16/2012 (found here: to 1/2/2013 (found here: However, in the same period of time the Dow Jones Industrial Average rose +6.55% but should have gone down in that period of time.


    * According to your Dow Theory analysis, stocks were in a primary bull market from 10/8/2012 (found here: to 11/16/2012 (found here: However, in the same period of time the Dow Jones Industrial Average fell -7.33% but should have gone up.


    * According to your Dow Theory analysis, gold and silver stock as represented by GDX/SIL were in a primary bull market from 9/5/2012 (found here: to 1/24/2013 (found here: However, in the same period of time, SIL declined by -3.17% while GDX declined -9.81%.


    This leaves aside the several times that an opposite indication was given within the overall primary trend, from beginning to end which we assumed was done in error.


    Leaving aside the points that you've made regarding Dow Theory getting an investor out of the market in time to avoid major losses, is it customary for a primary trend to lead an investor to potential losses if they don't happen to catch every secondary trend for trading purposes?


    Thanks for your continued work on this topic.


    Best regards.
    25 Feb 2013, 02:55 AM Reply Like
  • Manuel Blay
    , contributor
    Comments (369) | Send Message
    Author’s reply » Greetings NLO,


    I feel that my post


    addresses your remarks. A careful reading of that post explains your comments.


    At the risk of being repetitive, it is worth insisting that in real time, no technical analysis system can call the turn of the trend. Thus, the existing trend is presumed to exist until negated by a new signal. Of course, the new signal will not come in real time and thus, by definition, the technical analyst (Dow Theorists of all “flavors” included) will always be “late” in spotting the first and last stages of a trend.


    A “real time” example, may be helpful to illustrate what I try to convey.


    Currently, the stock market is near its highs. In “real time” our Dow Theory readings tell us that the primary trend is bullish. However, let’s imagine that the last highs we have seen were the “top” of the primary bull market and that recent price weakness were the start of a primary bear market. Is there any way to know that the trend has changed? No, there isn’t. Under Dow Theory, we see a primary bull market and a modest pullback in the making. However, this is not enough to declare the onset of a new primary bear market.


    So what I am supposed to do on February 25, 2013 (real time)? I am supposed to assume that the primary trend continues bullish until I get a primary bear market signal.


    However, there is no written guarantee that the primary trend will hold. Maybe we experience a secondary reaction and after a minor rally, the secondary reaction lows get violated in which case a primary bear market will be signaled in the future. If such were the case, then we should say that the top of the primary bull market was made on Feb 19, 2013 and since that date a primary bear market was under way.


    Would I have been wrong in applying the Dow Theory by writing on Feb 25, 2013 that the primary trend was bullish? No, I don’t think so. I real time, i.e. today, the only thing I can see on the charts is a primary bull market. If subsequent market action shows that the bull market was death as from February 19, so be it, then I will change and say that the primary trend turned bearish. However, I feel it would be unfair, to say that the Dow Theory or if it gets “ad hominem," this Dow Theorist was wrong because he was insisting that the trend was up whereas the trend had turned down. Of course, when there is a change in trend, there will always be some percentage points lost to the Dow Theorist. This is the nature of the game.


    Please mind that I constantly use the words “flashed” or “signaled." I always write that a primary bull/bear market was “signaled” on date “XX”. By using these verbs, I am meaning that the trend started prior to the “signal” date, but it became first recognizable when the “signal” was flashed in the charts. Thus, there is a lag between the onset of a new trend and its signal and during such a lapse of time (between trend change and subsequent signal) any technical analyst will be “wrong” (“wrong” in the sense of not being aligned with the new trend, but very “right” in the sense of properly applying his technical tools).


    However, the Dow Theory track record ( ) unmistakably shows that in spite of getting “late” or temporarily being out of tune when the trend changes, in the long term it is clearly a wonderful device for keeping investors safe and even slightly outperforming the stock market.


    As to the final question, which I quote:


    “Leaving aside the points that you've made regarding Dow Theory getting an investor out of the market in time to avoid major losses, is it customary for a primary trend to lead an investor to potential losses if they don't happen to catch every secondary trend for trading purposes?”


    End of quote.


    I don’t quite understand the question. Would you be so kind to reformulate it?


    With my defective understanding of your question, I can say: I am not interested in trading the secondary trend (neither is Schannep, nor, for the most part, Russell). The secondary trend is only of interest in order to define the highs and lows to be penetrated or violated for a primary bull (bear) market signal to be signaled. However, the decision to be in or outside the market is made exclusively based on the primary trend. All “track record” figures I have posted are based exclusively in following the primary trend. As it is clear from the track record, by following the primary trend, the investor would have been well served in the past. The clearest example is the Dow Theory performance during the secular 1966-1981 bear market. ( )


    I hope that this information is useful to you and to all readers.


    Best regards.
    25 Feb 2013, 12:50 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2543) | Send Message
    Greetings Manuel,


    This is getting back to the question of "what has the average length of the primary trend been historically?"


    As we've maintained, primary trends (bullish) historically last at least 2-4 years (as found here:


    In all the work on the topic of Dow Theory, I have not seen (showing my lack of vision on the matter) a primary trend last only a month or two at a time. Additionally, I have not seen a primary trend where it came out with a negative return in real time (whether acted upon or not).


    Furthermore, your recent work on the "classical" Dow Theory showed exceptional performance compared to buy-and-hold BUT over periods ranging from a year or more.


    Even though I question any interpretation that shows only a year for a Dow Theory primary trend, I cannot argue if the beginning and ending period showed a return that is positive on the representative index.


    As an example, our Dow Theory analysis indicated that the primary trend was bullish on July 23, 2009. At the time, the Dow Jones Industrial Average was at 9,069.29. When the primary trend changed to bearish on August 2, 2011, the Dow was at 11,866.62, an increase of +30% above the July 23, 2009 bullish primary trend. Since August 2, 2011, the Dow has fallen as much as -12% (in two months after that call) and gained +15% as of 2/24/2013 (annualized return of +10.33%).


    However, in the time that you've published on Seeking Alpha you've indicated primary trends, two full bull and bear primary trends for stocks and one full primary trend for gold which have all resulted in negative final numbers.


    Additionally, you readily admit, "I am very aware that recently this Dow Theory ‘flavor’ has signaled too many signals in too short time." Isn't it worth reconsidering the primary trend analysis that results in signals of less than 6 months?


    Dow, Hamilton and Rhea have indicated that the most money is made using the Dow Theory is by "playing" the secondary reactions. I thought, mistakenly, that you were applying that approach to your Dow Theory analysis instead of primary trends.


    25 Feb 2013, 02:09 PM Reply Like
  • Manuel Blay
    , contributor
    Comments (369) | Send Message
    Author’s reply » Greetings NLO,


    Contrary to your statement not all trends signaled ended up in losses. Facts are:


    The trend (more exactly: “position”) for stocks whose end was signaled in Nov 2012 ended with modest gains, as any reader can see here:



    The trend (more exactly:“position”) for gold and silver whose end was signaled on Dec 20, 2012 ended with modest gains for silver as can be found here:



    Only gold ended up with modest losses. By the way, and bearing in mind the debacle for gold and silver in the last few weeks, it doesn’t seem so unwise to proclaim that a bear market was signaled for both precious metals on December 20, 2012.


    As to the rest of the issues, you raise (which basically were already answered here: ), I will address them in a new post, as I feel it is a good exercise for us all to, once again, analyze your comments and discuss them accordingly.


    So readers of this blog stay tuned.


    Best Regards
    26 Feb 2013, 11:07 AM Reply Like
  • New Low Observer
    , contributor
    Comments (2543) | Send Message
    Greetings Manuel,


    You are being very generous by entertaining these somewhat redundant questions. Like you, we're students of the market and examine the topic from almost all angles.


    The data that was referenced was based on material posted to Seeking Alpha Instablogs. Our view is that it is an open forum for discussion that is widely available.


    However, it is recommended that you submit your articles for standard article publication. It is your proof that you did not alter your work and it is on record. We know that you stand by your work, just that there is evidence to support your claims. For people like you and I, it is a must since Dow Theory is seen mostly as hocus pocus.


    In your analysis of the gain/loss for the primary stock bull market from June 29, 2012 to November 16, 2012 (based on the links provided above), you said:


    "The entry point was at 136.1 for the SPY. The exit point was signaled on Nov 16. The SPY closed at 136.37. So, before commissions and slippage, those that invested along the primary trend, would have realized a gain of 0.20%."


    In your analysis of the gain/loss for the primary gold bull market from August 22, 2012 to December, 2012 (based on the links provided above), you said:


    "The Dow Theory primary bull market signal was given on August 22.


    "The entry price for GLD was 160.54"
    "The entry price for SLV was 28.92"


    The exit price for GLD was 159.73"
    The exit price for SLV was 29."


    "Thus, GLD holders have experienced a -0.5% loss. And SLV holders have experienced a +0.28% gain."


    Your references to GLD and SLV are correct, they did manage gains in the period described. Unfortunately, the gains of <0.30% suggests that the primary trend never really materialized. We openly wondered about what exactly is the primary trend if you gain less than 0.30% in gold and silver, or lose money in SIL or GDX.


    While we disagree about the length of what a primary trend is, if it results in gains of +0.30%, then those who are uninitiated by the breadth of Dow Theory and its benefits may end up thinking (justifiably) that from a cost/benefit standpoint, it may be more work than it is worth to follow Dow Theory for that kind of return. After all, a 1-year CD could have garnered the same annualized return without all the work.


    26 Feb 2013, 02:55 PM Reply Like
  • Manuel Blay
    , contributor
    Comments (369) | Send Message
    Author’s reply » Without prejudice to the full post that will follow further analyzing your observations, I feel it is necessary to clarify one thing:


    Not even the best trader/investor in the world has significant and constant returns guaranteed in each position he takes. This is especially true when it comes to technical analysis (i.e. Dow Theory).


    Thus, each trade/investment/position is unique. Some will result in small wins others will result in big gains (few of them), and some others will result in small losses (hopefully).


    Furthermore, as I have written extensively, the Dow Theory (and in general, all market-timing systems) tend to underperform buy and hold in good times. The outperformance comes in bad times (by losing less). Thus, as it is explained here ( ) the classical Dow Theory underperformed buy and hold during the 1982-1999 secular bull market. It must have been very trying to underperform most of the years during almost two decades. However, I would readily subscribe to such “underperformance” knowing that this is the price I pay to be protected when the going gets tough.


    Thus, small gains are not to be ridiculed. Furthermore, even if all positions ended with small losses, this wouldn’t impair the validity of the two market calls I made (one for stocks, once for PMs). I insist even the classical/Rhea Dow Theory tends to underperform buy and hold most of the time, which implies that the investor is always entering and exiting the trade “too” late. Accordingly, even for the classical Dow Theory most of the trends lack sufficient magnitude to enable the build-up of sizeable gains. But there is nothing wrong with this. The beauty of any Dow Theory flavor (and even a modest moving average) is to change the risk profile. One wins less in good times but losses less in bad times.


    Any trader and seasoned investor worth his salt, knows that in the very moment one leaves buy and hold, the profile of the trades looks as follows: Many minor losses and minor gains (which allows the investor to stay on the game) and some isolated big gains. This also applies to the investments made according to the Dow Theory (be it the “classical/Rhea” or the “Schannep’s version).


    If any Dow Theory amateur is deterred from adopting the Dow Theory because one transaction was not able to beat 1-year CD, then this amateur will remain an amateur for ever because he lacks the wits to understand (and the stomach to digest) the nature of long periods of underperformance, which is the price to pay for long term outperformance (both in absolute returns and risk-adjusted). If any single trade resulted in guaranteed money, then technical analysis and the Dow Theory would self destruct. Everybody would be following it. Precisely, what separates the winners from the quitters is the ability to understand the nature of underperformance, as merely the price to pay to reduce significantly risk and even outperform in the long run.


    As to the duration of trends, and, more importantly, profits extracted from each trend as determined by the classical Dow Theory, please allow me some time to come up with the promised new post. Time is always in short supply. It can be a very interesting study.


    Thx for bearing with me.


    Best Regards
    26 Feb 2013, 04:51 PM Reply Like
  • Manuel Blay
    , contributor
    Comments (369) | Send Message
    Author’s reply » Dear readers of this blog:


    The promised in-depth analysis concerning the observations made by the NLO is to be found here:



    and here:



    Have a nice weekend.
    2 Mar 2013, 09:30 PM Reply Like
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