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Dow Theory Update For October 11: Stocks Set Up For A Primary Bear Market Signal

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

Dow Theory trailing stop raised today

Today has been a rich day in Dow Theory relevant events. Let's examine them.

US stocks

The SPY, Industrials and Transports closed up.

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

The secondary trend is bearish (secondary reaction against the primary bull market) for the reasons explained here.

For three consecutive days, the SPY, Industrials and Transports rallied off the secondary reaction lows (Oct, 8). According to Schannep's Dow Theory, if at least one index rallies for 2 days and gains 3% or more, the stock market sets up for a primary bear market signal. This is what the Industrials, and the Transports have just made.

Here you have the relevant figures:



Rally high 15237.11 6648.41 170.26 Oct, 11
Sec react low 14776.53 6446.75 165.48 Oct, 8
Pct rally 0.0311697 0.03128088 0.02888567  

In other words: Both the Industrials and the Transports have exceeded the 3% "hurdle" and, accordingly, have set up the stock market for a primary bear market signal. Furthermore, by rallying more than 3% now we know that the October 8th lows are the final secondary reaction lows.

Now it is a moment of truth for stocks. Look at the chart below:



Setup for a primary bear market signal (red horizontal lines) completed. Now let's wait and see.

If at least two indices violated the red horizontal line (October 8th, secondary reaction closing lows), a primary bear market would be signaled.

On the other hand, if the rally continued and the horizontal blue lines (last recorded primary bull market closing highs) got jointly broken out, the primary bull market would be reconfirmed.

Please mind that, as a side-effect of today's price action, we have raised our Dow Theory trailing stop, which now stands at the last established secondary reaction closing lows of October 8th. More about the Dow Theory trailing stop, its importance, and how it works, here.

The implication of our raising our Dow Theory trailing stop is that our likely loss has been narrowed to a very modest -2.05%. As you can see, as prices advance, and each subsequent secondary reaction ends up at a higher level, so goes our stop higher and higher.

Today's volume was lower than yesterday's, which is bearish, as markedly higher prices were not met by expanding volume. I still see the overall pattern of volume as neutral, as I explained here.

Gold and Silver

SLV and GLD closed down. For the reasons I explained here, I feel the primary trend remains bearish. 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.

Here, I explained that GLD and SLV set up for a primary bull market signal. However, a setup is not the same as the "real thing," namely the primary bull market; thus, many "setups" do not materialize and until the secondary reaction closing highs are jointly broken up, no primary bull market will be signaled.

SIL and GDX closed down. SIL and GDX, unlike GLD and SLV, are in a primary bull market under the Dow Theory, as explained here and here.

The secondary trend is bearish, which is tantamount to saying that there is an ongoing secondary reaction against the primary bullish trend, for the reasons given here.


The Dow Theorist