Manuel Blay's  Instablog

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 27: Industrials Make Higher Highs Unconfirmed  0 comments
    Feb 27, 2013 4:49 PM | about stocks: SPY, DIA, IYT, GDX, SIL, GLD, SLV

    Lack of confirmation should not persist too long

    Special note on gold

    Jon Strebbler, Richard Russell's new associate, is turning bullish on gold. He is of the opinion that is likely that a bottom has been made. I also think so, not so much because of the charts but because of the "puke" indicator. I order to become "technically" bullish on precious metals I need to see a primary bull market signal.

    One off topic: Richard Russell's description of the perfect business encapsulates lots of wisdom. You can find it for free in his Dow Theory Letters website.

    GLD lost yesterday (Feb 26) 2.41 tonnes of gold. Thus, inventories have been declining for 6 days in a row. All in all, inventories have declined from 1322.97 tons to 1270.44 tonnes, that is 52.53 tonnes or 3.97%.

    I have written extensively about the bullishness of such an event (contrary to conventional wisdom), as you can find here and here.


    The SPY, Industrials and Transports closed up today. The Industrials made a higher high unconfirmed by the SPY and Transports. Persistent lack of confirmation may be hinting the onset of a secondary reaction. The primary and secondary trend remains bullish.

    Here you have an updated chart of the three indices I monitor displaying the lack of confirmation:



    (click to enlarge)
    Industrials make higher highs unconfirmed by the Transports and SPY

    Volume receded today as prices advanced, which has a bearish connotation. Thus, today we had the seventh bearish volume day in a row.

    Hence, the four bearish volume readings I aluded to here remain fully valid. In addition to them, we have to closely watch whether the SPY or Transports make new highs, thereby confirming the Industrials. Failure of confirmation would be another "minus".

    Here you have an updated chart depicting volume and price action. Even the untrained eye can see that rallies result in declining volume whereas volume develops activity during pullbacks.



    (click to enlarge)
    Volume is bearish. Will market action prove volume right?

    Gold and silver

    Leaving aside the "puke" indicator or the analysis of Jon Strebbler, the fact is that the primary and secondary trend of the market remains bearish. If a bottom has been made, we shouldn't rush. If a trend of sufficient magnitude develops we will be given ample warning by the Dow Theory, since it is better to miss the first 6-8% up movement and enter a trend with proven odds of survival than to try to call the exact bottom or top.

    This is why I separate my musings about gold from market action. Today gold and silver closed down (which was due after 4 days of relentless advance). What happens next will be vital: Will the lows made last week hold or will they be violated? In the meantime, we will wait.

    One thing is clear to me: According to the Dow Theory the last four days rally is not enough to qualify as a secondary reaction against the prevailing primary bear market. It does not fulfill the requirements of time (minimum 10 days) and extent (ca. 3% for gold and ca. 6% for silver). Why I require a higher volatility threshold for silver. Go here and you will know why.

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


    The Dow Theorist

    Stocks: SPY, DIA, IYT, GDX, SIL, GLD, SLV
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