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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 March 21: Stocks Closed Down On Huge Volume  0 comments
    Mar 21, 2014 5:41 PM | about stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL

    Are Chinese stocks under a bear market?

    Even though all trends (primary and secondary remain unchanged), today's been an interesting day.

    Recently, Zero Hedge posted an article entitled "Chinese Stocks enter Bear Market Following 2 More Defaults Overnight". As per Zero Hedge, Chinese stocks have declined more than 20% and, hence, they entered a primary bear market. I beg to disagree on three counts:

    a) Because Chinese stocks have higher volatility than US Stocks (at least the relevant indices) and hence when taking benchmarks like 20% we should compare apples to apples.

    b) Because the "famous" -20% benchmark to declare the existence of a primary bear market, is an arbitrary measure and has no strong predictive power whatsoever (even for US stocks where such a benchmark was developed). Schannep has done considerable research on this matter (Chapter Six of his excellent book: "Dow Theory for the 21stCentury") and proves that for US stocks there are more accurate benchmarks.

    c) Because under the Dow Theory no primary bear market signal has been flashed yet. Chinese stocks remain under a primary bull market, albeit there is an ongoing strong secondary reaction.

    If I find time, I'll try to write a short post explaining more in-depth the Chinese situation under the Dow Theory. Let's hope for the good of the economy and even word-wide peace that a primary bear market signal is not signaled. In the meantime, I give the benefit of doubt to the existing primary trend which is bullish.

    US Stocks

    The SPY, Industrials and Transports closed down on enormous volume (which was not seen since December 20, 2013). The SPY briefly exceeded its most recent highs and from that point reversed with violence on high. This tends to be a bearish sign (of short term consequences, though).

    The primary trend remains bullish, as explained here, and more in-depth here.

    The primary trend was reconfirmed as bullish on October 17th, 2013, and November 13th, 2013 and March 7th, 2014, for the reasons given here, here and here.

    So the current primary bull market signal has survived three secondary reactions.

    The secondary trend is bullish too, as explained here and here.

    Gold and Silver

    SLV closed unchanged, and GLD closed up. For the reasons I explained here, and more recently here, and in spite of all the bullishness than now surrounds gold and silver, the primary trend remains bearish.

    For the primary trend to turn bullish, SLV and GLD should jointly break above the secondary (bullish) reaction highs. As a reminder, the secondary reaction closing highs were made on August 27th, 2013. From such highs the market declined without jointly violating the June 27th, 2013 primary bear market lows.

    By the way, I alerted that the secondary trend turned bullish long ago (on July 22, 2013), when most market pundits were solidly bearish, as you can read here. Now, those very pundits are very bullish as only the sky was the limit. I take the middle road based on the Dow Theory: Since July 22, 2013 there was technically good reason not to be so bearish; on February 14th, 2014, there is no reason to be long term so bullish.

    Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

    On a statistical basis the primary bear market for GLD and SLV is getting old. More than one year since the bear market signal was flashed has elapsed. However, I am extremely skeptical as to the predictive power of statistics. I prefer price action to guide me, and the Dow Theory tells me that the primary trend remains bearish until reversed.

    Furthermore, the June 27, 2013 lows remain untouched. The longer this situation lasts, the higher the odds that something might be changing. But I wait for the verdict of price action.

    As to the gold and silver miners ETFs, SIL and GDX closed up. GDX is exceeding the last recorded secondary reaction highs whereas SIL is failing to do so.

    The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GLD are not in a primary bull market.

    The primary trend for SIL and GDX remains, nonetheless, bearish, as was profusely explained here and here.

    Here you have the figures for the SPY which represents the only market with a suggested open long position:

    The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GLD are not in a primary bull market.

    The primary trend for SIL and GDX remains, nonetheless, bearish, as was profusely explained here and here.


    The Dow Theorist

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