Thursday, December 20, 2012

Dow Theory Update for Dec 20: Gold and Silver in a primary bear market


No changes in precious metals stocks ETFs.

Normally, I start my daily post in this Dow Theory blog by talking about stocks. Today’s action in gold and silver beg for a change.

Gold (GLD) and silver (SLV) closed down today. Silver violated its November 2 secondary reaction low, and with it confirmed the previous violation made by gold 12/18/2012. 

Here you have an updated chart:

A text book primary bear signal in silver (SLV) and gold (SLV)
Under Dow Theory, the confirmed violation of the secondary reaction lows implies a primary bear market signal. We should nuance that today’s signal means that the correction that got started on October 4, 2012 was the first leg of the new bear market. In other words, the market did not turn bearish today but on October 4, 2012; however, under Dow Theory, it has become recognizable today. Some will bemoan the belated identification of a primary bear market. Regrettably, there is no known way for a timing system to detect in real time a change in trend. Furthermore, it should be stressed that the Dow Theory tends to do a very good job a signaling changes of the primary trend well before the investor suffers major damages. As I wrote in my post “Revisiting the 1987 crash”, which you can find here, the Dow Theory tends to do a remarkable job at getting investors out of investments on a timely manner.

In this specific case, GLD closed at 159.73. Its 10/04/2012 high was at 173.61. Thus, after a modest decline of 7.99% (from the highs) a primary bear market has been signaled. Given that gold’s volatility is not dissimilar to that of stocks indices, such a decline is very much in line with that observed in primary bear market signals for stocks.

As to silver, SLV closed at 29. Its 10/04/2012 high was at 33.93. Thus, silver has experienced a 14.52% decline. Given that silver more than doubles gold’s volatility (and accordingly, the wise investor should expose less capital to silver), silver’s decline is also within reasonable parameters.

To add insult to injury today gold closed below its 200 days MA. This is also a bearish sign.

How much should one have made if one had followed the Dow Theory in this specific instance?

The Dow Theory primary bull market signal was given on August 22. More details here

The entry price for GLD was 160.54
The entry price for SLV was 28.92

The exit price for GLD was 159.73
The exit price for SLV was 29.

Thus, GLD holders have experienced a -0.5% loss.

And SLV holders have experienced a +0.28% gain.

As you can see, even when facing adversity or, to put it mildly, headwind, the Dow Theory does a pretty good job at containing losses and even securing modest profits. Maybe I am biased by my trader mentality, but I tend to see each position, each investment as a “trade” and the outcome of each one is irrelevant, as performance is built by entering many trades and, more importantly, by not losing much when suffering failed signals. I also know from my trading experience that when using “timing” systems or trend following systems (and the Dow Theory is part and parcel of them) most of the trades sport modest gains. The key is to contain losses. With luck 1 out of 10 trades will be a monster winner. I know this profile is difficult to stomach. However, there is no way around it.

Of course, now the question is: How much will gold and silver go down? The answer is: We simply don’t know. Rhea made clear that neither the duration, nor the extent of a primary bull or bear market can be forecasted in advance. So the primary bear market could finish tomorrow, or maybe it can last one full year. We simply don’t know.

What we do know is that the odds favor lower prices in the weeks and months ahead. A primary bear market signal is a powerful signal, and it is telling us that lower prices are more likely than higher prices. We also know that, irrespective of the particular outcome of each Dow Theory signal (some may go sour), those that follow the Dow Theory tend to outperform those that don’t while reducing risk significantly. More about this in my post "Why I love timing. Why I love the Dow Theory as a capital protector" which you can find here.

Of course, all what I am writing about concerns “paper gold” or GLD and the long-term trend (1-2 years).  What I write does not concern physical gold and the secular trend (i.e. 10 years). To know more about the difference between both types of gold, I encourage you to read my post “Not all “gold” is born equal. Gold and the Dow Theory” which you can find here.

Personally, I believe gold is undergoing a secular bull market and, thus the current primary bear market, doesn’t imply the end this secular bull market. However, one should bear two things in mind:

a)     I can be wrong. You know that I tend to be quite skeptical as to long term fundamentally-based forecasts.

b)  Even if right, my bullish assessment belongs in the very long-term and, hence, for shorter term investors and traders, it does not negate the validity of today’s primary bear market signal.

Let’s turn to stocks.

The SPY, the Industrials and the Transports closed up today. Neither the Industrials nor the SPY bettered their respective 09/14/2012 (SPY) and 10/05/2012 (Industrials) highs. Thus, the breakout made by the Transports on 12/18/2012 has not been confirmed yet. The longer the lack of confirmation persists, the more likely a reversal in prices under Dow Theory, since the principle of confirmation is vital for a primary bull (or bear) market to be signaled.

All in all: The primary trend for stocks remains bearish, and the secondary trend remains bullish.

Volume was lower today and since stocks closed up, it has a bearish implication. Volume remains neutral in my opinion.

As to the stocks miners: No news. SIL refuses to trade below the Nov 15 lows. The primary trend remains bullish and the secondary trend bearish.

Here you have the figures of the markets I monitor for today.

Data for December 20, 2012


Bear market started
09/14/2012 147.24
Bear market signaled
11/16/2012 136.37
Last close
12/20/2012 145.12
Current stop level: Bull market high


Price chg since bear mkt signaled Tot decline since start bear mkt Max Pot Loss %

6.42% -1.44% -7.38%


Bull market started
05/16/2012 149.46
Bull market signaled
08/22/2012 160.54
Last close
12/20/2012 159.73
Current stop level: Sec React low
11/02/2012 162.6

Realized Loss % Tot advance since start bull mkt

-0.50% 6.87%


Bull market started
06/28/2012 25.63
Bull market signaled
08/22/2012 28.92
Last close
12/20/2012 29
Current stop level: Sec React low
11/02/2012 29.95

Realized gain % Tot advance since start bull mkt

0.28% 13.15%


Bull market started
07/24/2012 17.08
Bull market signaled
09/04/2012 21.83
Last close
12/20/2012 22.38
Current stop level: Bear mkt low


Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

2.52% 31.03% 27.81%


Bull market started
05/16/2012 39.56
Bull market signaled
09/04/2012 47.77
Last close
12/20/2012 45.07
Current stop level: Bear mkt low


Unrlzd gain % Tot advance since start bull mkt Max Pot Loss %

-5.65% 13.93% 20.75%


The Dow Theorist

No comments:

Post a Comment