Friday, August 18, 2017

Dow Theory Update for August 18: Stocks close to a secondary reaction, but not there yet





Recent pullback in SLV and GLD is not a setup for a primary bull market signal



The primary trend is bullish since November 21st, 2016, as explained here and here.

The primary trend was reconfirmed on July 3rd, 2017 as was explained here

The Transports have been diverging from the SPY and the Industrials by declining whereas the other two indices continue making higher highs. On August 9th, I wrote that such a sustained divergence might be indicative of an impending secondary reaction. Well, on August 18th, we almost have a secondary (bearish) reaction against the primary bull market.

     As you can see on the charts below, the Transports have been declining for 25 trading days. The Industrials and the SPY have just declined for 9 days. As per Schannep’s Dow Theory, the time requirement for a secondary reaction has been almost met. Schannep requires: 

        1) A decline that must last at least 10 calendar days on 2 of the 3 indices. The SPY and Industrials have declined for exactly 11 calendar days (from 8/8/2017 to today). 

          2) The average time of decline of the three indices measured in trading days must be at least of 8 trading days. In our case the Transports have declined for 25 trading days whereas the SPY and the Industrials have declined for 9 trading days. So the average decline amounts to 14.33 days, which clearly fulfills the average time of the decline. 

   
All in all, the time requirement has been met.

However, the extent requirement has not been met. At least two indices should decline by more than 3%. The Transports have declined ca. -6-6%. However, the SPY and the Industrial have declined less than 3%. Thus, the extent requirement has not been met. Either the SPY or the Industrials or both should further decline. 

The orange rectangles on the right side of the charts display the ongoing decline (which is not a secondary reaction yet).

Here you have an updated chart:

 
No secondary reaction yet
Therefore, there is only one last shoe to drop for a secondary reaction to be signaled. Either the SPY (SP 500) or the Industrials should drop a little bit more to reach the 3% threshold. Until then, no secondary reaction is in place.

And what about the “Rhea/classical Dow Theory”? As a reminder, the “classical” Dow Theory just uses the Industrials and the Transports. Well, it we demand three weeks (15 trading days), the time requirement has not been met, as the Industrials have just declined for 9 trading days. Even if we required just two weeks, we are yet to see 10 days of declines. Please mind that when Schannep uses the “Rhea/classical” Dow Theory, he demands 3 weeks of declining prices. Thus, the time requirement has not been met.

As to extent requirement, it hasn’t been met either.


GOLD AND SILVER

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.
 
SLV pulled back for 3 trading days, whereas GLD pulled back for 2 trading days. While the time requirement for a pullback to setup both ETFs for a primary bull market has been met (at least two trading days), the extent requirement has not been met, as neither SLV not GLD have declined at least -3%.

So we have to wait.

Here you have an updated chart.

Solid secondary reaction (blue rectangles on the right side of the charts)

 
GOLD AND SILVER MINERS EFTs


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

The secondary trend is bullish as explained here

As was explained here, SIL and GDX have set up for a primary bull market signal.

Days pass by and nothing happens. Well, this is normal. Patience. 

Here you have an updated chart, so that you check the lack of action by yourself.

 
Nothing happens. Neither bull signal, nor reconfirmation of primary bear market
Sincerely,
The Dow Theorist

Wednesday, August 9, 2017

Dow Theory Update for August 9: I feel SLV and GLD are not in a primary bull market yet



Trends for stocks unchanged


Time remains in short supply.


The primary trend is bullish since November 21st, 2016, as explained here and here.

The primary trend was reconfirmed on July 3rd, 2017 as was explained here

The Transports have been diverging from the SPY and the Industrials by declining whereas the other two indices continue making higher highs. Such a sustained divergence might be indicative of an impending secondary reaction. 

Here you have an updated chart. The chart in the middle displays the Transports which are clearly diverging. 

The Transports might be signaling an impending change of secondary trend
 


GOLD AND SILVER

The primary trend was declared bearish on July 7th, 2017, as explained here and here
The current rally qualifies as a secondary reaction against the primary bear market. Both GLD and SLV rallied for 16 trading days, which is more than 3 weeks. So the time requirement, any way you measure it (Schannep’s Dow Theory or “Rhea/Classical” one) has been fulfilled.


On the other hand, as to the extent requirement the confirmed rally has retraced on a confirmed basis more than 1/3 of the previous primary bear market swing. More specifically, SLV has retraced ca. 40% of the previous bear market swing, whereas GLD has retraced ca. 65%. Given such a solid retracement on a confirmed basis I don’t need to use volatility adjustments in order to declare the existence of a secondary reaction. The secondary reaction is displayed with blue rectangles on the charts below. The retracements are shown by the thin horizontal lines with numbers attached to them (0.00%, 23.60%, 38.20%, etc.)


The red rectangles highlight the pullback which followed the secondary reaction closing highs of 7/31/2017. While in technical analysis everything is debatable, I feel that the depth of the pullback is not ample enough to set SLV and GDX for a primary bull market. As you  can see on the spreadsheet below, GLD has merely declined -1.02%, whereas SLV has declined a meager -3.58%. According to the Dow Theory (when applied to US indices) a movement lesser than is to be neglected. However, we also know that the pullback setting up stocks (or precious metals) for a primary bull market signal need not be confirmed. In other words, since SLV has declined more than 3% and GLD, while declining less than 3% has not diverged from SLV, one might be tempted to say that the setup has been completed. 



The blue rectangles on the right side of the charts display the ongoing secondary reaction

 
However, I feel that given that (a) GLD has barely moved, (b) the pullback has lasted just a few days, we should at the very least perform some kind of volatility adjustment. More about volatility adjustments when one moves away from stock indices here


So let’s take a look at the spreadsheet below:




The SPY’s 30 days average volatility (close-to-close percentage change) has been 0.2217%. SLV’s 30 days average volatility has been 0.8296%. So SLV has been almost 4 times more volatile than the SPY during the last 30 days. Thus, if we multiply the minimum movement of 3% required for any movement to be meaningful by 3.74 (the volatility ratio) we obtain a minimum adjusted volatility of 11.22%. While I might be willing to settle with a somewhat lower adjusted volatility, -3.58% is too far away from 11.22%. Hence, my judgment call, is to consider the pullback as not relevant, and hence I cannot declare the secondary reaction as finished. Today’s higher highs, are not a primary bull market signal (as there was no setup), but, rather, higher highs made by the ongoing secondary reaction.

I insist, everything is debatable. However, this is the way I see things. Furthermore, in such not so clear-cut cases, is good to remember that (a) The primary trend for GDX and SIL remains bearish and no primary bull market signal is to be expected in the next few days; (b) the trend for SLV and GLD when appraised with weekly bars by using the Dow Theory is solidly bearish.

All in all, the primary trend remains bearish, whereas the secondary trend is bullish (secondary reaction against the primary bull market).


GOLD AND SILVER MINERS EFTs


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

The secondary trend is bullish as explained here

As was explained here, SIL and GDX have set up for a primary bull market signal.

Days pass by and nothing happens. Well, this is normal. Patience. 

Here you have an updated chart, so that you check the lack of action by yourself.

Time pass by and nothing happens. The bear deserves the benefit of doubt
 

Sincerely,

The Dow Theorist