Archive for the ‘Gold’ Category


In black swan, DIA, dow theory, ETF, ETFs, GDX, Gold, OIL, transports, Uncategorized, XIU on June 25, 2009 at 4:03 pm

New Dow Theory Position

New Dow Theory Position

I recently went to an electronics retailer in search of “noise canceling headphones” for my iPod. You know, the kind you see people wearing on the airplane – they “cancel” out any ambient noise (my wife calls them “Sarah canceling headphones”). When you put them on you feel like someone shut the door on a noisy party next door. It makes you focus on the topic at hand. In my case I use the iPod mostly for audiobooks and it makes a big difference.

It made me think: “What if we had noise canceling headphones for the markets?”.  Often times, that’s what Dow Theory feels like to me. It cuts through the clutter of the day to day noise in the financial press and gives you an objective answer as to the primary trend of the market. Beyond a doubt the biggest question I get lately is “Is the Bear market over?”  I’m going to give you the answer in this post. But first a refresher:

1. Dow Theory provides us with a binary answer. That means it’s either 1 or 0. There is no room for interpretation. The “noise” as it were, is cancelled out. A “BEAR” signal is in force until such time as a “BULL” signal has been given. Think of the light switch in your kitchen. Once you turn the lights OFF, you can’t turn them OFF again until you turn them ON. There is a lot of bad information on the web about Dow Theory, including some high priced subscription letters that have made many mistakes in the last two weeks interpreting this exact situation.

2. Charles Dow, writing over 108 years ago, used only daily closing prices. An intra-day high is just more noise that is canceled out. The reason is that Dow felt that a closing price trumped all other intra-day prices because it represented a price that traders and investors were happy to carry home overnight. This showed more of a commitment.  This is important as you will see below.

Now I’m going to give you the answer. As you can guess from the image on this post, we are still in a BEAR market. That’s because the last unique Dow Theory signal was a SELL signal way back in November of 2007. That’s right. The light switch has been OFF since November 2007. We are waiting for a Dow Theory BUY signal if and only if the markets can better their most recent secondary reaction highs. What does that mean? That’s technical mumbo jumbo for “the market has to make higher highs and higher lows”. There’s no doubt that the Dow Industrial stocks have done this. They have bettered the May peak by a good margin. However, Dow required the two indicies to confirm each other. The Transport stocks have stubbornly NOT confirmed the high in the Dow Industrials.   The daily close that we need for a Dow Theory BUY signal is a higher close on the Transportation Average of 3404.11.  Above I stated closing prices were important.  That’s because two weeks ago the Dow Transports were on the verge of giving a signal intra-day, and then reversed and closed lower and therefore failed to “flip the switch” to ON.  Let’s look at a chart to see what I mean:

Dow Theory 24 June 09

Dow Theory 24 June 09

The point I am trying to impress upon you is that the Dow Transportation stocks may “know something” that the Dow Industrials don’t.  The failure of the Transports (lower high in June than in May in lower box above) signals a divergence in the indicies.  William Hamilton, Dow’s understudy, warned of such divergences in the indicies as potential danger spots.


In black swan, DIA, dow theory, Gold, transports on March 12, 2009 at 1:39 am

March 11, 2009… Yesterday’s massive 7% rally on the Dow where 96% of the volume was on rising stocks, lacked enough punch to produce a follow-through of more than 5 Dow points today.  The Bear is still in the marquee position on this site as it has been since November of 2007.  Chart 1 shows the Point and Figure target of the recent breakdown is $47 on the Diamonds (DIA) Dow proxy:


GOLD STALLS… The downside target for Gold remains around $830 based on the sell signal shown in Chart 2.  Declining jewerly demand and lack of catastrophe buying has halted the demand for Gold below it’s all-time high of $1030.


OIL FALLS… On news that the OPEC production cut that was expected March 15th may not materialize.  Is this a new down leg or just a pause after the recent breakout to the upside?  Chart 3 shows the bullish target at $60.  A decline in the US dollar may help oil reach that target.


NDT Conclusion: Continue to focus on capital preservation.   This is still a BEAR market until proven otherwise.  Bear market rallies can be tantalizing opportunities, however, only the most nimble of traders can make money on the long side when the primary trend is down.


In DIA, dow theory, ETF, ETFs, GDX, Gold, XIU on January 10, 2009 at 7:06 pm

New Dow Theory Position

New Dow Theory Position

JANUARY 9th, 2009 —

The Florida Gators won the national college football championship this week. They won it on defense. Coming into the game, the prolific Oklahoma sooners wowed everyone with five straight games of putting up 60 points or more. They hadn’t, however, encountered a defense like the Gators. The Gators shut down the Sooners with their stiffling defense and held them to a stingy 14 points.

The point is that the old saying “defense wins championships” is just as true in the investment world as it is in the football world. You have to defend your investment account from your opponent – in this case the bear market. The year 2008 was a great example of winning using defense, or as you’ve heard me say “winning by not losing”. Take a look at the returns accross the globe in 2008:

Dow Industrials -34.7%

TSX Toronto -36.2%
S&P 500 -39.3%
Dow Transports -24.8%
Dow Utilities 31.7%
NYSE Composite -41.8%
Nasdaq 100 -42.4%
Russell 2000 -37.0%
Gold +4.25%
Paris -42.7%
Frankfurt -52.2%
London -32.0%
Japan -42.1%
Zurich -34.1%
Sydney -44.1%
Shanghai B -69.7%
Hong Kong -48.9%
GOLD HITS RESISTANCE… You may have noticed that the only market that was positive in 2008 was g old. In fact, gold has been up in each of the last six years. That constitutes a bull market in gold. The reasons are plenty — the massive stimulus packages announced by the central banks of the world, the weakness in the US dollar, and the fear caused by the nasty bear market. As you can see in Chart 1, if gold can clear the $875 hurdle, I believe the third phase of the gold bull market will be underway.

THE VIX HITS SUPPORT… Although the market has rallied 20% from the November 20th lows, the primary trend remains down. One of the things that may provide a headwind for the market is the Volatility Index. Remember that this indicator usually goes in the opposite direction of the market. It has declined to a level of support that may indicate that the stock market rally is coming to an end. Chart 2 shows the support level of the VIX and the S&P 500 rally losing steam.

DOW THEORY REMAINS BEARISH… It’s important not to lose sight of the primary trend. The primary trend is like the tide of the ocean. The secondary trend can be likened to the waves on the tide. The past few weeks have been positive waves (secondary trend), however, it is still too early to tell if the tide has turned. This is one of the most perplexing parts of studying the market. If you can get the primary trend right, you can make a lot of money.
QUESTION: What would it take to signal a new primary bull market?
NDT ANSWER: On this point, Dow Theory is open to interpretation. In fact, two other well known Dow Theorists have already turned positive on this market. In strict parlance of Dow Theory, we would need to see either one of the Dow Industrials or Dow Transports decline to new lows (below Nov 20th closing prices of 7522.29 for the DJIA and 2988.99 for the DJT), while the other index doesn’t. This is called a non-confirmation. Then we need to see both rally and exceed the recent peaks of early this week.
QUESTION: We’ve already seen a rally from the Nov 20th lows of over 20%. Is there any way we can profit from any further rally?
NDT ANSWER: Yes. You can buy ahead of the official Dow Theory signal. In fact, one of the biggest criticisms of Dow Theory is that it lags the market. You either have to accept this fact or decide to “jump the gun”. This involves additional risk and it comes down to a personal choice. I prefer to advise my more conservative clients to wait and continue to play defense.
QUESTION: If I was intent on “jumping the gun” what would I buy?
NDT ANSWER: I would buy an Exchange Traded Fund (ETF) that represents the entire Dow Jones Industrial Average (DIA). Right now you could also consider a smaller position in GDX for gold shares, or the XIU on the TSX for the entire Toronto exchange. In total, only buy a position of no more than 20% of your account and use a stop loss 8% under your purchase price.
CONCLUSION: Continue to focus on capital preservation. He who loses the least in a bear market is the winner. There will be plenty of time to make money once the primary trend turns positive.


In dow theory, Gold, OIL on September 22, 2008 at 1:53 pm

GOLD RALLIES ON FLIGHT TO SAFETY… Investors worried about soaring inflation spurred by the bailouts of AIG, Fannie May and Freddie Mac pushed gold up to $878 an ounce. The Federal Reserve in the US is leading the rescue party. An increase in the money supply causes general price levels to rise. Gold is a hedge against such price increases. Also, the Chinese newspaper The China Daily carried an editorial urging diversification out of US$. The buying stampede in gold, known as a “hard” currency, resulted in the largest one-day increase since 1979.

Chart 1

OIL RALLYING AFTER 50% RETRACEMENT… After a massive move in oil to a record $150 a barrel, the July to September correction took prices back near $91. This coincided with an OPEC statement suggesting $90-$95 Oil was acceptable. Now I’m looking for oil to rally back to the declining blue trendline around $107-108.

Chart 2

VIX HITS HIGHEST LEVEL IN YEARS… The market’s “fear” gauge hit levels previously seen only at short-term bottoms in the stock market. Generally, spikes to extreme levels are followed by short-term rallies. Yesterday’s panic selling in US financial stocks may have been one such time. Once the fear starts to subside (as it is today – highlighted in yellow) it usually results in a market rally.

Chart 3