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Dow Theory Update For July 1: Dissecting The Ongoing Secondary Reaction For US Stocks

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

Is paper gold dying?

Yesterday, I warned that the secondary trend for stocks had turned bearish on June 29th (secondary reaction against the primary bull market). Please mind that I slightly depart from Schannep when it comes to considering "in the clear" signals and subsequent secondary reactions. More about this small discrepancy here and here.

Today I will give you some more details as to the ongoing secondary reaction. It has not been an easy one to discern. Therefore, this past post (which gauged the situation on June 11), may be helpful so that readers of this Dow Theory blog get the full big picture concerning the appraisal of the current secondary reaction.

Here you have the chart:

Orange rectangles on the right of the chart display the ongoing secondary reaction

On May 19th (blue arrow) the Industrials exceeded the last recorded primary bull market highs. The SPY did likewise on May 21st. Two higher confirmed closing highs served me to consider the primary bull market reconfirmed on that day, in spite of the lack of confirmation of the Transports. From that date all three indices have declined more than three percent (which is the minimum extent requirement for a secondary reaction to be declared). The spreadsheet below displays the details:

Therefore, both the time requirement (more than 8 trading days of declining prices as the average for the three indices) and the extent requirement (more than 3% declines in at least two indices) has been met, and hence we can declare stocks under a secondary reaction.

From this point on, we have to wait for a >3% rally in at least one index. This would set up US Stocks for a primary bear market signal. Such a rally has not occurred yet. So we have to wait and monitor subsequent price action.

The primary trend remains bullish, as explained here and here.

GOLD AND SILVER

The primary trend is bullish as explained here.

The secondary trend turned bearish on February 6th, 2015 (secondary reaction against the primary trend) as explained here.

The setup for a primary bear market signal was completed on March 24, 2015 as explained here.

Thus, now:

a) Either the primary bull market closing highs 01/22/2015 are bettered in which case the primary bull market will be reconfirmed.

b) Or the secondary reaction lows are violated in which case a primary bear market will be signaled.

We have to wait and see.

While I am no friend of "fundamental" analysis, it is stunning to see the lethargy of gold which seems unable to stage a decent rally even when global financial turmoil (Greece, Puerto Rico, drums of war, etc.) seems to be engulfing us. This has prompted Barry Ritholtz, of "The Big Picture" blog, to deride gold by quite rightfully saying that "Gold can't find a Bid". From a technical point of view I agree that gold (and silver even worse) looks weak. The secondary reaction against the primary bull market is lasting too long, and technically, supply seems to hold the upper hand. My only "fundamental" contention (so please take it with a healthy dose of skepticism) is that maybe what we see is the upcoming death of "paper" gold, which, according to renowned blogger FOFOA, is quite different from "physical" gold. If according to "free golders" (those that follow the tenets expounded by Fofoa, Foa and Another) "paper" gold is doomed (but physical gold isn't), then what we see on the charts merely reflect the painful agony of a monetary system based on the USD and paper gold (as a prop for the USD). While being utterly skeptical of all fundamentally-based explanations of reality, if I a had to choose one concerning the future of the monetary system, gold, etc., I'd take Fofoa's, and this is a big compliment to him coming from a dye-in-the-woods technician. More about Fofoa and his insights here.

GOLD AND SILVER MINER'S ETFs

As to the gold and silver miners ETFs,on 3/10/15 SIL violated its 12/16/2014 primary bear market closing low. However, GDX did not confirm. As per the Dow Theory lower lows unconfirmed have no validity, and hence we cannot declare a primary bear market. Since we cannot declare a primary bear market, the primary trend remains bullish. Furthermore, the GDX and SIL staged a rally that set them up for a primary bear market signal on March 24, 2015 as explained here.

Thus, now:

a) Either the primary bull market closing highs 01/20/2015 are bettered in which case the primary bull market will be reconfirmed.

b) Or the secondary reaction lows (or the primary bear market lows of SIL, and secondary reaction lows of GDX) are violated in which case a primary bear market will be signaled.

Once again, we have to wait and see.

US DEBT

As to US debt, a primary bear market signal was signaled on June 3rd, 2015. All price action from June 3rd remains bearish, and hence both the primary and secondary trend for US debt remains bearish.

Furthermore, the brand new primary bull market for the EUR is no good omen for US debt. The primary and secondary trend for the EUR (and CHF) remains bullish.

Here you have the details:

http://www.dowtheoryinvestment.com/2015/06/dow-theory-special-issue-us-bonds.html

By the way, Barry Ritholtz has rightfully noted the inability of gold to stage a decent rally even amid financial turmoil. However, I also note that US debt has been unable to convincingly rally under equally favorable circumstances for alleged "shelters", which seems to tell us that there is inherent weakness in US debt. What we know for sure, is that US debt is in a primary bear market, and hence, the odds favor lower prices in the days and weeks ahead.

The chart below shows the last primary bear market signal and how US debt has been unable to stage even a decent "death cat bounce".

US Debt: Primary bear market

Sincerely,

The Dow Theorist