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Dow Theory Update For Dec 21: Stocks Down. No Change In Trends

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

Precious metals mixed.

Let's get started with our Dow Theory comment.

The SPY, Industrials and Transports closed down. For a third day in a row, neither the Industrials nor the SPY deigned to confirm the breakout made by the Transports on Dec 18. Such lack of confirmation is troubling, and the longer it persists, the more likely the ongoing bear market will continue. As I have written here.

Rhea wrote that the principle of confirmation becomes more important the longer the time frame. In other words, a primary bull market signal is meaningless without confirmation. The same basically applies to secondary reactions. However, when it comes to rallies (or small pullbacks in bear markets) which I would label "tertiary movement," some Dow Theorists are lukewarm with the principle of confirmation.

Thus, it is vital that the Transports' breakout of December 18 be confirmed by either the Industrials or the SPY for a new primary bull market to be signaled. In the absence of a primary bull market signal, we have to conclude that the primary trend remains bearish as per the signal of 11/16/2012 and that the current rally is merely a secondary reaction against the primary bearish trend.

Volume today was huge. Given that it was a clear down day, it has a bearish implication. I'd label the overall pattern of volume as neutral.

Gold (NYSEARCA:GLD) was slightly up. Silver closed unchanged. Even though my stomach rebels at the Dow Theory verdict, I must insist that the primary trend is bearish as per the Dec 20 signal. I am aware of the manipulation thesis. However, manipulated markets can go up or down due precisely to such manipulation and, hence, result in losses for those not willing to heed the market's warnings. This implies that lower prices are likely in the next weeks and months ahead. Of course, this can be a failed signal. Nevertheless, we are not in the business of getting all trades right but merely protecting capital by setting technically effective stop losses and letting profits run until the trend reverses by using trailing stops determined according to the Dow Theory. More about the important skill of setting stops in my post in this Dow Theory blog "Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory's trailing stop" which you can find here.

Therefore, the primary trend is bearish as well as the secondary trend.

As to SIL and GDX (the gold and silver miners ETFs), SIL closed down and GDX closed up. No change in trends. The primary trend is bullish and the secondary bearish.


The Dow Theorist