Stocks and precious metals up.
Let’s see what the Dow Theory
has in store for us today.
Yesterday I finished my post
on this Dow Theory blog by promising information about SIL and GDX. Should we raise
our stops? The full answer at the bottom of this post.
Stocks closed up today. There
was unanimity.
Volume, however, was muted and
being an up day it has, again, a bearish connotation. As you can see in the
updated chart below, the red arrows (bearish volume days) are mounting.
Volume persistently bearish |
As to gold and silver both closed
up today. SLV made a higher high unconfirmed by GLD. The primary trend remains
bullish whereas the secondary trend remains bearish.
The gold and silver miners
ETFs closed up today. The primary trend remains bullish while the secondary
trend remains bearish.
Yesterday, I told you to stay
tuned as to whether we should change the exit points (until now, the last
bear market lows) for SIL and GDX.
The answer is: No. We don’t
have to change our Dow Theory trailing stops yet.
Here is the “why”:
Look at the table below:
30 days Volatility | Multiple | 3% rally adjusted | |
SPY | 0.006392 | ||
SIL | 0.014303 | 2.237640801 | 6.712922403 |
GDX | 0.015432 | 2.414267835 | 7.242803504 |
As you know, under Dow Theory,
once a secondary reaction has been signaled, the rally starting from the lows
should at least amount to 3% in one index. Anything less than 3% is meaningless
and to be ignored. However, the 3% rule was formulated for stock indices (DOW,
SPY) whose volatility is lower than that of SIL or GDX. Hence, we have to make
some adjustment. If you look at the table above, SIL's and GDX's volatility
more than doubles that of stocks. Hence, a rally for SIL must exceed 6.71% (7.24%
for GDX) to be relevant under Dow Theory.
Now look at the table below:
Highest High | Date | Lowest Low | Date | Sec Reac dec | Rally high | Date | Rally advance | |
SIL | 25.58 | 10/04/2012 | 21.99 | 11/15/12 | -0.140344019 | 23.38 | 11/23/12 | 0.06321055 |
GDX | 54.81 | 09/21/2012 | 45.97 | 11/15/12 | -0.161284437 | 48.74 | 11/23/12 | 0.060256689 |
This table shows us the
percentage corrected by SIL and GDX as well as the percentage gained in the
current rally. We can see that -14% and -16% declines for SIL and GDX fully
qualify for a secondary reaction, even after we adjust for their higher
volatility. Furthermore, we declared the existence of a secondary reaction well
before such retracements were made, since both ETFs broke a “line." More
about the line and the secondary reaction here and here
Thus, we cannot say that the
secondary reaction lows have been made and that its violation would entail a
primary bear market and hence our exit point. In order to establish a secondary
reaction low (in this case the 11/15/2012 lows) as the final lows of the
correction, we need a rally exceeding 6.71% for SIL or 7.24 for GDX. After such
rally, a violation of the 11/15/2012 would signal a primary bear market and,
thereby, our exit point (and new trailing Dow Theory stop, as it happened with
gold and silver, as you can read here).
However, given that we have
not had a relevant rally under Dow Theory, the violation of the 11/15/2012
would not be a primary bear market signal, but merely a lower low in the
ongoing secondary reaction.
Of course, we are not dealing
with certainties. The 6.32% rally is quite a rally and it is quite close to the
volatility adjusted 6.71% qualifying threshold. Maybe I should bend my own
rules and declare the last rally as relevant and thus, establish our exit level
at the 11/15/2012 lows. However, I am quite adamant. Our goal is not to be right
all the time but merely to have a defined framework of analysis in order to
distil order out of the apparent chaos of the markets. And I know that if I
follow the time-tested rules of the Dow
Theory, I will come out ahead of the game irrespective of the outcome of one
individual trade.
All in all: It is too soon to
change the exit point for SIL and GDX. Since I cannot say with confidence that
the final secondary reaction lows have been established, our exit point remains at the last primary
bear market lows of 07/24/2012 (SIL) and 05/16/2012 (GDX).
Here you have the figures of
the markets I monitor for today.
Data for November 29, 2012 | |||
DOW THEORY PRIMARY TREND MONITOR SPY | |||
SPY | |||
Bear market started | 09/14/2012 | 147.24 | |
Bear market signaled | 11/16/2012 | 136.37 | |
Last close | 11/29/2012 | 142.14 | |
Current stop level: Bull market high | 147.24 | ||
Price chg since bear mkt signaled | Tot decline since start bear mkt | Max Pot Loss % | |
4.23% | -3.46% | -7.38% | |
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD) | |||
GLD | |||
Bull market started | 05/16/2012 | 149.46 | |
Bull market signaled | 08/22/2012 | 160.54 | |
Last close | 11/29/2012 | 167.18 | |
Current stop level: Sec React low | 11/02/2012 | 162.6 | |
Unrlzd gain % | Tot advance since start bull mkt | Min Pot Gain % | |
4.14% | 11.86% | 1.28% | |
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV) | |||
SLV | |||
Bull market started | 06/28/2012 | 25.63 | |
Bull market signaled | 08/22/2012 | 28.92 | |
Last close | 11/29/2012 | 33.13 | |
Current stop level: Sec React low | 11/02/2012 | 29.95 | |
Unrlzd gain % | Tot advance since start bull mkt | Min Pot Gain % | |
14.56% | 29.26% | 3.56% | |
DOW THEORY PRIMARY TREND MONITOR ETF SIL | |||
SIL | |||
Bull market started | 07/24/2012 | 17.08 | |
Bull market signaled | 09/04/2012 | 21.83 | |
Last close | 11/29/2012 | 23.02 | |
Current stop level: Bear mkt low | 17.08 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
5.45% | 34.78% | 27.81% | |
DOW THEORY PRIMARY TREND MONITOR ETF GDX | |||
GDX | |||
Bull market started | 05/16/2012 | 39.56 | |
Bull market signaled | 09/04/2012 | 47.77 | |
Last close | 11/29/2012 | 48.04 | |
Current stop level: Bear mkt low | 39.56 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
0.57% | 21.44% | 20.75% |
Sincerely,
The Dow Theorist.
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