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Dow Theory Update For Nov 8: Stocks Down

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

Let's begin with our brief Dow Theory analysis for today in this blog.

The SPY, Industrials and Transports closed down. The Transports continue, by far, displaying greater relative strength. However, we have to keep an eye on the action of the Transports in the coming days. From the 09/28/2012 lows at 4892.62, the Transports rallied until 11/06/2012 to 5203.6 for a gain of 6.35%. Since such an upward movement exceeded 3% it qualified as a rally under Dow Theory. It would be bearish action if the Transports violated the 09/28/2012 lows. So I will keep an eye on the action of the Transports like a hawk. Until now, however, the Transports, unlike the Industrials and SPY, have not broken the lowest lows hitherto made during the secondary reaction. I am reluctant to ascribe a bearish implication to the action of the Industrials and the SPY because their violation of their latest recorded secondary reaction lows was not at least preceded by a rally of at least 3% in either or both of them. Precisely, the only index that showed a rally exceeding 3%, the Transports, is the only index that has refused to violate its lows.

Volume was lower than yesterday's, so it has a bullish implication since it was a down day. The pattern of volume continues mixed.

What I find noteworthy, is that the trend of the Gold/Dow ratio has turned bullish, which denotes stronger gold than stocks. In spite of all gold price gains, the ratio remained bearish since many months ago, since it kept making lower lows. As you can see in the chart below (marked with a blue rectangle) the ratio staged a secondary reaction against the primary bearish trend. Then a pullback followed, and the subsequent rally broke about the preceding ratio highs (marked with a horizontal green line). Since the Silver/Dow ratio was already in a bullish mode months ago, we can conclude that:

1) The odds favor gold out performance over stocks in the coming months.

2) Both gold and silver should benefit from the latest bullish signal of the Gold/Dow ratio. We shouldn't forget that since a bull market was signaled for both metals under Dow Theory (August 22, 2012) silver has displayed greater relative strength.

3) While not in itself a bearish signal for stocks (they may go up but less than gold), the bullish ratio for gold doesn't do any good to stocks.

Here you have the chart:



Gold Dow ratio turned bullish

As to the Precious Metals universe it was a bullish day. Gold closed clearly up and silver closed slightly down. Their respective miners ETF closed up. Technically, nothing has changed. The primary trend for gold and silver remains bullish, and the secondary trend remains bearish. As to the miners ETFs the primary trend remains solidly bullish, and it remains doubtful whether the miners are in a secondary reaction.


The Dow Theorist