Contributor Since 2012
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Investor and Trader As an investor I'm deeply influenced by Dow Theory, especially by the book "The Dow Theory for the 21st Century". I focus on the primary trend (1-2 years). My trading is short-term based (avg trade duration 4-5 days).
In addition to US stock indexes, I have successfully expanded the application of the Dow Theory to precious metals, their miners, and US interest rates. The Dow Theory is a more accurate timing device that moving averages, breakout systems, etc.
Trends for precious metals and miners unchanged
This post has been written and matured during the weekend. It is being posted some 25 minutes after the open of Monday 27.
Well, the markets have cast their ballot too. Today, Friday, June 24th, the S&P 500 has closed 3 points below its May 19th closing lows (secondary reaction lows). The Industrials and Transport have also amply violated their respective secondary reaction lows (5/19 and 5/13 respectively).
In my last post I wrote that both the "Rhea/classical" Dow Theory and Schannep's had setup for a primary bear market signal. Since all three indices have violated their secondary reaction closing lows, a primary bear market has been signaled by both Dow Theory flavors. Hence, the verdict of the markets is without appeal: A primary bear market has been signaled any way you cut it. I don't have a crystal ball, and I don't pretend to know the future. What I know, though, is that the signal has been conclusive: both Dow Theory flavors in unison are saying the same.
Here you have an updated chart:
|The markets did cast their ballot too: New primary bear market|
For those trying to second guess the current signal, it is worth remembering that the very long term trend (I dare to call it "the secular-technical trend as determined by the Dow Theory") remains firmly bearish, as was explained here. As readers of this Dow Theory blog know, I am quite skeptical when it comes to determining the secular trend. However, a practical shortcut, which in the past has been dependable, to gauge the very long term trend, has been to apply the Dow Theory to weekly bars. As I wrote on September 7th, 2015:
"However, "weeklies" may be useful as a technical means to determine the secular trend. Let's make a thought exercise. If when using "dailies" a Dow Theory primary bull/bear market signal is signaled ca. every 1-2 years, when using weeklies, we can expect signals to be signaled every 5-10 years, which is well attuned to the secular trend (multiplier of 5). I have some research (which will remain private for the time being), and the longer the time frame (by using, i.e. weeklies) the less noise, and hence the less signals. In other words, when being in a x 5 greater time frame, signals will not necessarily be signaled x 5 slower, but rather, you may expect even them to be signaled more than x 5 slower. Readers of this Dow Theory blog know that I am highly skeptical as to the usefulness for the average investor of the secular trend (more about his here and here). Having said this, if I had to rely on a method to gauge the secular trend, it would be technical (as with Dow Theory with "weeklies"), and certainly not, value/fundamentally based."
Thus, the upper time frame trend (weekly bars) is certainly against ascending prices. While I personally live and die by daily bar signals, and hence I took the today extinguished primary bull market signal ignoring the adverse technical-secular trend, it is clear that there are "technical gravitational forces" against higher prices. Why I don't trade signals issued when applying the Dow Theory to weekly bars? Two reasons advocate for my reluctance to trade according to weekly bars:
a) Sell signals tend to come too late. Thus, if I had to time my exit with "weeklies" I could not have avoided the 1987 market crash (or 1929 for that matter).
b) Buy signals tend to come too late too. It is true that "better safe than sorry", but there have been strong bull markets in the past that were born with a "buy" signal based on daily bars whereas the trend according to weekly bars was still bearish (2009 comes to my mind). Even if I get a failed buy signal (because I am trading against the secular trend), the Dow Theory manages to have well contained losses, and hence I'd rather run the risk of losing on half of my trades ca. 5% (or less) and have the opportunity to win 30%, 40% or even more in the successful ones. However, I can well understand more conservative investors which (A) sell based on daily bars, in order to try to avoid market crashes; (B) buy only when the buy signal has been signaled by the Dow Theory when applied to weekly bars.
Thus, I have no regrets for having honored the primary bull market signal that was flashed on April 13th, 2016.
Going back to crashes: Hitherto the Dow Theory (when applied to daily bars) has been lucky enough to avoid all major crashes (1929 and 1987 come to my mind,). Today's price action was lousy, and the mild dead cat bounce fizzled out quickly (very short term traders, though, could take advantage of it to unload shares and even make some bucks for the day). Those having exited at today's close (or, hopefully, to exit at Monday's open) may have closed the trade that started on April 13th with very small losses. While I am not a fortune-teller, I know that negative momentum tends to beget more negative momentum. Major crashes have been preceded by a "black Friday". Could we be at the doors of a market crash? We will see shortly. In any instance, I have honored the sell signal.
What I know is that the price action of the last few days has been very treacherous for the Dow Theory. It has been a real "life stress-test". It has been more perfidious than that seen on past market crashes. Thus, both in 1929 or 1987, the primary bear market signal was the result of a pullback that had been going on for some days. Their respective secondary reaction lows were not violated all of a sudden. The last few days have witnessed a very deceitful action. Stocks had been gently advancing for some days, and today, suddenly, stocks gapped down to close violating the secondary reaction lows. This kind of market action is the one to be expected when a major natural disaster occurs. Something unexpected that suddenly hits, and with it, wealth gets destroyed. It has been the Brexit meteorite.
As Zero Hedge reports in its post A Veteran Trader Explains "The Essence Of Mayhem-DaySurvival", there is a convergence of technical and fundamental factors:
"It's done. Britons voted to leave the EU. But this isn't the time to be sitting around with mouth agape, shaking your head. Market technicians talk about "key day reversals." They're important signals that are ignored with peril. Warning of a powerful rejection of a trend at its most extreme. If you look at the charts this morning you'll find them all over the place. Daily, weekly and monthly charts confirming each other.
In this case, it's an even more imperative call to action because it had a major fundamental cause. A key day reversal for U.K. governance with global economic implications."
(bold letters in original. Yellow marking added)
While I am skeptical as to fundamental explanations of reality, I have the eerie feeling that the Brexit will have profound consequences which the markets will take some days to digest, and that today's price action has merely been the prelude. Hence, while I am always disciplined, this has been one of the easiest times for me to be disciplined.
So let's see how the Dow Theory has fared under this "meteorite" conditions. The primary bull market was signaled on April 13, and the SPY closed at 208.00. Today the SPY closed at 203.13. This amounts to a -2.34% loss. This is a well contained loss bearing in mind that we are undergoing very tough market conditions. Of course, I'd be even happier with the Dow Theory if next Monday's open obliges with prices in the vicinity of today's close. Past Dow Theory signals foreshadowing market crashes allowed Dow Theorists not only to escape mayhem at the close of the signal day, but also at next day's open. Let's see what happens on Monday.
Rhea wrote that nobody can predict the extent and duration of a primary bear market. So we will sit and wait. It could be a false signal, or it can be the real thing. Nobody knows in real time. However, what we know that statistically, is that following a primary bear market signal the S&P 500 declines on average a further -12.85% until the final bottom is made. But don't get fooled by averages, big bear markets (with crash -1987- or like a slow motion torture -2008-2009-) have witnessed much larger losses following the primary bear market signal. Hence, here the best loss is the first loss. More details about further declines following a primary bear market signal, here.
Here you have the updated spreadsheet:
|Following a primary bear market signal, the S&p 500 has further declined -12.85% on average|
GOLD AND SILVER
The secondary trend is bearish (secondary reaction against the primary bull market), as explained here.
On June 9th, SLV and GLD set up for a primary bear market signal, as explained here. Subsequent market action has not changed the current picture. Today (June 24th) GLD bettered its primary bull market closing highs, unconfirmed by SLV. Hence higher highs unconfirmed prevent me from declaring the primary bull market a reconfirmed, and, accordingly, nothing has changed technically: The setup for a primary bear market signal remains fine and well.
Here you have an updated chart:
|GLD (bottom) has made bettered the last recorded primary bull market highs. SLV did not confirm.|
GOLD AND SILVER MINERS ETFs
The primary and secondary trend is bullish as explained here
The most recent decline experienced by SIL and GDX did not qualify as a secondary reaction. Recent confirmed higher highs have set the clock for a secondary reaction to zero (more about it here).
The Dow Theorist