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Dow Theory Update For Feb 14: Measuring The Odds For A New Correction

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

New low in gold unconfirmed by silver

Let's begin our Dow Theory commentary in this blog by talking about stocks.

Zero Hedge posted yesterday an interesting article concerning the current rally (primary bull market swing in Dow Theory parlance) and its odds of its stretching further into the future.

Zero Hedge notes that the current primary bull market leg has been in motion for the SPY since Nov 15, 2012, which amounts to 60 trading days with an unrealized gain of 12%. According to Zero Hedge, the average duration of such primary bull market swings since 2009, amounts to 55 days, which suggest that the current primary swing is neither young, nor too old. As to returns, the average return of an uncorrected primary swing is 17.9% (median 15.2%). Thus, if we measure the current primary bull market swing according to unrealized gains, the current leg hasn't even reached an average (or median) gain.

What's my Dow Theory take on that? While nobody can predict the future, we are not talking of an "old" trend. This primary swing statistically has still good odds of survival; both in terms of time and, especially, in terms of unrealized gains.

Furthermore, according to the Dow Theory (and Rhea's writings) primary bull market swings tend to last on average 100 days without being interrupted by an important secondary reaction. I am mindful, however, that such magic "100 days" figure is just an average derived from both secular bull and bear markets. Being as we are now under the spell of a secular bear market, I'd dare to say that the odds favor shorter primary bull market swings (more in line with the figures advanced by Zero Hedge).

In any instance, this is just market gossiping. We follow the primary trend, we ride the corrections through, and our exit point is not determined by the maturity of the primary bull market swing but by price action. Until we get a primary bear market signal, we have to assume that the primary bull market is still in force. In other words, we follow the trend and stick to it until it finally reverses.

The point of discussing such figures is just to deepen our understanding of how markets work. Being an expert in any walk of life, is not prejudicial to one's success. Therefore, being mindful of odds, average returns and average durations rather than changing our application of the Dow Theory (which is much simpler to the point of being boring) helps as fortify our will and determination to stick to the relatively simple Dow Theory rules. At least for me, market knowledge is just the crutch I need not to throw the towel when the going gets (inevitably in investments) tough. However, I insist, the strict application of the Dow Theory to the markets doesn't need such an arsenal of stats. In just requires fortitude.

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

Today's volume was higher than yesterday's. Since most stocks closed up, it was a bullish volume day.

Gold (NYSEARCA:GDX) closed down. So down, actually, that it made a lower low (the primary bear market lows of Dec 20, 2012 have been violated). However, silver (NYSEARCA:SLV) while closing also down, has hitherto refused to make a lower low. The longer such non confirmation lasts, the higher the odds for a secondary bullish reaction to develop. However, until then, we continue to label both the primary and secondary trend as bearish. Here you have an updated chart showing the latest price action.



Primary trend bearish for GLD and SLV. However, lower low of GLD unconfirmed by SLV

As to the gold and silver miners ETFs (GDX and SIL) both closed down today. The primary and secondary trend remains bearish.


The Dow Theorist