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Dow Theory Update For May 31: A Secondary Reaction In The Making?

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

Gold and silver unable to show strength

Let's get started with our analysis of the markets under the prism of the Dow Theory


The SPY, Industrials and Transports closed down. While it is still too early to declare a secondary reaction in existence, we should keep our eyes glued on the charts. The Transports have been declining for 9 days. The Industrials and SPY for just 3 and 7 days. Thus, it is still too early to declare a secondary reaction since the last recorded highs. However, little by little we approach our 10 trading days requirement. Thus, and in spite of our "gut feeling," we stick with the rules and keep classifying both the primary and secondary trend as bullish.

Here you have an updated chart. The blue rectangles signal market action since the last recorded highs.



Still too early to declare a secondary reaction, but keep an eye on the blue rectangles

Today's volume was the highest seen since 04/15/2013. Furthermore, today's volume was much higher than yesterday's, which is bearish. To add insult to injury, today's pivot low (see the chart below), was bearish as today's volume clearly exceeded the volume seen at the preceding pivot low. Both pivots are highlighted with an ellipse, and both lows are connected with a red line. In my post of May 22, which you can find here, I stressed that the volume action seen on that day, negated any bullish volume reading. Thus, to recap, we have the following bearish volume signs:

1. Today's bearish volume day within an overall pattern of bearish volume days in the last 3 days.

2. Today's bearish pivot low.

3. Very bearish action on May 22.



Volume is becoming bearish

Therefore, the overall pattern of volume has become bearish. If we couple this bearish volume reading with the lack of confirmation of the last highs made by the Industrials on May 28 (more details here), we can conclude that the odds favor the development of a secondary reaction. Let's see what happens.

Gold and Silver

GLD and SLV closed down. The primary and secondary trend remains bearish.

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

Yesterday, I wrote some comments concerning the relationship between the miners, gold and paper gold. You can read them here.

If I get some time, I plan to finish this weekend my study concerning the "classical/Rhea" Dow Theory record. You can find the first part of this study here.


The Dow Theorist