Yesterday
we discussed that a new primary bull market in gold and silver stocks was under
way as per my interpretation of the Dow Theory.
Today,
we are going to look into the details of the Dow Theory signal.
For
the purposes of this post I will use the silver miners ETFs SIL (for silver
miners) and GDX (for gold miners).
The
last leg down (primary movement) established new lows for the move.
These are the prices and dates to note:
39.34
GDX on 05/15/2012
16.79
SIL on 05/16/2012
Thereafter,
there was a rally (a full secondary correction, using Dow Theory terminology) that
lasted 24 trading days in GDX. The rally ended on 06/18/12. The high of the
rally was 47.73. This amounts to a rally 21.3% off the lows which, under Dow
Theory standards is a full-fledged secondary correction (the minimum acceptable
movement should be at least 3%). Furthermore, such display of momentum (a 21.3%
gain in one month) might be in itself an indication that the tide had turned
from bearish to bullish.
Dow Theory signals a bull market in silver and gold miners |
Thus,
both rallies qualify as a correction of the previous primary down move, since
both movements exceeded 3% and lasted more than 10 trading days. Three percent
(3%) is the minimum magnitude under Dow Theory for a movement to be considered
as significant. Under Dow Theory a rally (or decline) must last at least 10
trading days to be considered as a correction of the primary move.
From
that point on, both markets staged a new leg down. However, both SIL and GDX refused to make a lower low
(that is the lows of May were not violated).
Little
by little both markets staged a new rally and:
On
8/21/2012 the previous correction HIGH at 47.73 was bettered by GDX.
On
09/04/2012 the previous correction HIGH at 20.03 was bettered by SIL.
So,
although with some delay, eventually both GDX also exceed
its previous correction high and hence confirmed SIL.
Under
Dow Theory we got a primary bull market movement signal.
I’d
like
to dispel one misconception here. When I say that on 09/04/2012 Dow
Theory signaled a new primary bull market, I don’t mean that the bull
market started
on such date. The bull market started when the last bear market
finished. And
the last bear market finished when the last primary movement lows were
recorded
(05/15/2012 and 05/16/2012). However, the end of such bear market cannot
be
recognized in “real time”. Under Dow Theory one has to wait for a
secondary
correction to develop, a subsequent decline that fails to break the last
recorded lows and a new up movement that exceeds the previous correction
highs.
Thus, as with any timing system, the Dow Theory can never get us “in” or
“out”
in real time. However, it is accurate enough to get us “in” or “out” in a
sufficient timely manner to make profits and, more importantly, to avoid
decimating losses.
Furthermore,
it is noteworthy that we are seeing higher highs and lows since 07/24/2012. In
each rally GDX and SIL are establishing higher highs and lows. Under Dow Theory
higher highs and lows hint at a bull movement of secondary nature at least.
We also see in the cart that SIL is stronger than GDX (red line trending up). The SIL/GDX ratio is clearly in favor of SIL. In my humble opinion, this is a sign that the market is in "risk on" mode. In and by itself it is not enough of a signal but when we weight all evidence available (and the most important one is Dow Theory) I can only say that I don't see the much feared deflation on the horizon.
We also see in the cart that SIL is stronger than GDX (red line trending up). The SIL/GDX ratio is clearly in favor of SIL. In my humble opinion, this is a sign that the market is in "risk on" mode. In and by itself it is not enough of a signal but when we weight all evidence available (and the most important one is Dow Theory) I can only say that I don't see the much feared deflation on the horizon.
In other words, the primary tide of the market
has turned bullish for both metals miners and the secondary tide of the market
seems, for the time being, also bullishly aligned with it.
For those with an inclination for number
crunching, I give you the calculation upon which I have applied the Dow Theory.
SIL
|
||||||
Last leg primary movement down
|
||||||
PRIOR
HIGH
|
26.02
|
02/28/2012
|
||||
LAST
LOW
|
16.79
|
05/16/2012
|
||||
Amount
primary
|
0.54973198
|
|||||
movement
|
||||||
Correction
until June 20, 2012
|
||||||
Correction
High
|
20.03
|
06/20/2012
|
||||
Last
low recorded
|
16.79
|
05/16/2012
|
||||
Total
rally (sec corr)
|
0.19297201
|
More than 3% it is a full correction
|
||||
total points last leg down
|
9.23
|
|||||
total
points correction
|
3.24
|
|||||
%
secondary
|
||||||
corrected
|
0.35102925
|
It also fulfills the more flexible rule of at
least 1/3 retracement
|
||||
GDX
|
||||||
Last leg primary movement down
|
||||||
PRIOR
HIGH
|
57.26
|
02/28/2012
|
||||
LAST
LOW
|
39.34
|
05/15/2012
|
||||
Amount
primary
|
0.45551601
|
|||||
movement
|
||||||
Correction
until June 20, 2012
|
||||||
Correction
High
|
47.73
|
06/18/2012
|
||||
Last
low recorded
|
39.34
|
05/15/2012
|
||||
Total
rally (sec corr)
|
0.21326894
|
More than 3% it is a full correction
|
||||
total points last leg down
|
17.92
|
|||||
total
points correction
|
8.39
|
|||||
%
secondary
|
||||||
corrected
|
0.46819196
|
It also fulfills the more flexible rule of at
least 1/3 retracement
|
Sincerely,
The Dow Theorist
Hi Dow Theorist,
ReplyDeleteWhen you say "In each rally GDX and SIL are establishing higher highs and lows. " what do you mean?
Does a rally need to be net >3% and last 10 trading days to be considered rally or decline?
Can you pinpoint several highs, lows points for GDX.
I ask because i am in the process of writing code based on Dow theory.
Thanks,
Fil
Hi bstart
DeleteFirst of all, the Dow Theory doesn’t lend itself well to being programmed because there is lot’s of room for human judgment. And this is a good thing. All reputable Dow Theorists have spoken of “weighting the evidence."
What I have accomplished, it to write code that reflects primary bull and bear markets conditions. However, the ascertainment of primary bull and bear markets has been made by a human being.
Rallies and declines (in Rhea’s terminology) are the minor movements not to be confused with the secondary movement. Sometimes they have been called “tertiary” movement. Thus, the 10 trading days minimum requirement applies for a secondary reaction to exist, not to rallies and declines. Secondary reactions by definition are secondary movements against the primary trend.
“Higher highs and lows” means that it is noticeable to the eye that each “pivot” tends to be higher and not lower.
The 3% minimum requirement for a movement to be meaningful applies only to stocks. When dealing with other markets with different volatility I conduct adjustments. A 6% movement in gold has more relevance than a 6% movement in silver, given silver's higher daily volatility. This post in this blog explains further volatility adjustments for non stock market.
http://www.dowtheoryinvestment.com/2012/10/dow-theory-update-for-oct-15-no.html
I strongly recommend the reading and sweating of the three books I mention here.
http://www.dowtheoryinvestment.com/p/dow-theory-basics.html
Sincerely,
In the book -- "Dow Theory for 21st century by Jack Schanne " in Pg no. - 9 There's a line -- " For the purpose of this discussion, a rally or a decline is one or more daily movements resulting in a net reversal of direction exceeding 3 percent of the price of either average . Such movements have little authority unless confi rmed in direction by both averages, but confirmation need not occur on the same day. "
ReplyDeleteSo, only the upmoves with its high point 3% more than its low point is considered rally AND So, only the down moves with its low point 3% lesser than its high point is considered decline. The high and low points are called pivot points AND Higher highs and lows are these pivot points.
Such series of Rallies with Higher-high and series of decline with higher low and vice-versa are majorly useful in ----
1) Appraising secondary reactions( though not all rallies and declines are secondary reactions)
2) Forecasting the -- a) Resumption of the Primary trend
b) Continuation of the Primary trend
c) Change of the Primary trend
Manuel Sir, Hope I am correct.
Regards,
Farid, India