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Dow Theory Update For May 16: Secondary (Bullish) Reaction For US Stocks And Setup For Primary Bull Market Completed

Summary

Primary and secondary trends for precious metals unchanged.

I am writing before the close, so things might change. Readers beware and do your own homework.

US STOCKS

The primary trend turned bearish on April 9, as was explained here, and more in depth here

An in depth post mortem of the last primary bull market and the entrails of the current primary bear market signal was penned here and here. In order to fully understand what I am going to write right now, you’d better read the two posts I have just linked.


As a reminder, the primary bear market was signaled by the “Rhea/classical” Dow Theory when the Transports confirmed on April 9th the previous violation of the secondary reaction lows made by the Industrials. However, the S&P 500 never violated its 2/8/2018 secondary reaction lows, which implies that no signal as per the rules of Schannep’s Dow Theory was given. However, as Schannep ceaselessly repeats, “the first to give the signal is the winner”, which means that if the classical Dow Theory gives a signal as per its own rules, such signal (and change of trend) is to be heeded.

Thus, once we are in a primary bear market, we have to start to look either for a new breakdown (reconfirmation of the primary bear market), the breakup of the last recorded primary bull market highs (which implies a new primary bull market), or the development of a new secondary reaction against the ongoing primary bear market.

As per the “Rhea/classical” Dow Theory no secondary reaction has developed yet. As you can see from the chart below, the Industrials have been rallying since their 3/23/2018 closing lows. The Industrials (bottom chart) has been rallied for just 7 days (from 4/9 to 4/18) as shown by the grey rectangle. I display the rectangles with grey color, in order not to be mistaken with a secondary reaction (which I display “blue” if bullish or “red” if bearish). Hence the grey rectangles display rallies which do not qualify as a secondary reaction as the time requirement has not been met.

Here you have a chart with the data at the yesterday’s close.

Grey rectangles display the ongoing rally which does not qualify as a secondary reaction as per the Classical Dow Theory

However, if we apply Schannep’s Dow Theory we can discern the existence of a secondary reaction. A weird one, indeed, but, nevertheless, a secondary reaction which meets all of Schannep’s requirements.

First of all, here you have a chart with the data at yesterday’s close:

Light blue rectangles display the secondary (bullish) reaction against the primary bear market

Let’ start by the Industrials (chart on the top). The light blue rectangle (on the right side of the chart) displays the rally that took place from the last recorded lows (3/23/2018) until 4/17/2018 for a total of 16 trading days. The rally took the Industrials from a low at 23533.20 to a high of 24786.63, which amounts to 5.33% (which is more than the minimum requirement of +3%). Thereafter, there was a decline (orange rectangle on the right side of the chart) until 5/2/2018 which brought the Industrials to 23924.98. This declined amounted to -3.47% (which is more than the minimum -3% requirement).

As to the Transports, they rallied for 7 trading days. The rally got started on 4/10/2018 and ended on 4/18/2018. From the lows at 10119.36 to 10770.15, the Transports rallied +6.43%. From the highs of 4/18/2018 to the lows of 5/3/2018 (10254.64) the pullback amounted to -4.78% (orange rectangle on the right side of the chart).

The S&P 500 (bottom chart) made their closing lows on 2/8/2018 (2581.00). Thereafter it rallied for 21 trading days until 3/9/2018 (2786.57) which amounts to +7.96%. From 3/9/2018 to 4/2/2018 a pullback followed (orange rectangle) to make a low at 2581.88, which is a total decline of -7.34%.

So the extent requirement for a secondary reaction has been more than fully met.

What about the time requirement? Schannep’s Dow Theory demands that at least two indices rally for at least two calendar weeks. This requirement has been more than fulfilled by the Industrials and the S&P 500. Furthermore, the three indices should have rallied for an average of at least 8 days. 16 (Industrials)+7 (Transports)+ 21 (S&P 500) /3= 14.66 days, which more than meets the time requirement.

All in all, we have a secondary reaction and a pullback exceeding -3% that setup US stocks for a primary bull market signal.

Of course, such a primary bull market signal would be annoying. Why? Because, we would be forced to buy at a higher price than our previous sell, which is tantamount to saying that our “sell” of April 9th, 2018 would have been a “whipsaw”. Please mind that as per the historical track record, primary bear market signals have had sufficient follow through to enable the next “buy” (primary bull market signal) at a lower level that the previous “sell”. However, we have to take what the market gives us, not what I’d like it to give me, and if we are forced to re-enter the market at a somewhat higher price so be it. Something similar happened with the last primary bull market signal (it came out of a whipsaw) and, nonetheless, was a clear winner. Furthermore, and while I stay disciplined, I am keenly aware that Schannep’s timing indicator is in red, which means that the odds favor more declines, not sharp advances. More about Schannep’s timing indicator (which he makes available for subscribers) here.

I also know that the cyclical bull market that got started in 2011 is old, very old, which is clearly headwind for further advances. The only good news is that the primary trend when appraised by weekly bars remains bullish. More about the use of weekly bars under the Dow Theory here

All in all, we sit and wait.

GOLD AND SILVER

In spite of all the turbulences that seem to afflict markets. The precious metals have not even changed their secondary trends.

The primary trend was declared bearish on July 7th, 2017, as explained here and here

The secondary trend is bullish, as was profusely explained here.

The pullback that got started on September 8th, 2017 has unambiguously setup SLV and GLD for a primary bull market. A quite different issue is whether the signal will be ever given. An in-depth explanation here. Please mind that a “setup” is not the actual signal. GLD has broken up above the secondary reaction closing highs (on 1/24/2018, 2/14/2018, and 2/15/2018) unconfirmed by SLV. Thus, no primary bull market has been signaled and the primary trend remains unchanged.

GOLD AND SILVER MINERS EFTs

Precious metals (both the stocks ETFs anb the precious metals themselves remain listless for many months now. Hence trends have not changed.

The primary trend is bearish, as was explained here and here.

The secondary trend is bullish as explained here

For the same reasons given when analyzing SLV and GLD, no primary bull market has been signaled for SIL and GDX, as explained here. GDX did not better its secondary reaction closing highs by a hair, but it failed to do so. Furthermore, SIL was very far from its secondary reaction closing highs.

On 11/10/2017 SIL violated its primary bear market closing lows (red arrow on the right side of the chart). GDX has not confirmed. Lack of confirmation implies that the primary bear market has not been reconfirmed, and, as with GLD and SLV,the longer it takes for GDX to confirm the higher the likelihood that the primary bear market may be nearing its end.

Therefore, the current situation remains unchanged. We have a primary bear market signaled on 10/04/2016 (more than one year old, another candle to light). There is an ongoing secondary reaction against the primary bear market and a setup for a primary bull market.

Sincerely,

The Dow Theorist