Wednesday, October 31, 2012

Dow Theory Update for Oct 31: SIL displaying strength



No changes in trends.
 

No big news today, so this Dow Theory commentary on this blog will be brief.

The SPY closed unchanged, and the Industrials were slightly down. Transports, again displaying more relative strength closed up. Technically, nothing has changed. The primary trend remains bullish, and the secondary trend remains bearish. It has been a so neutral day that I prefer not to derive any inferences from volume.

As to gold, silver and their respective miners ETFs all of them closed up for the day. The miners displayed greater relative strength. Particularly, SIL closed slightly below the highest high of 10/04/2012.  The silver universe keeps on being strong.

The primary trend of gold and silver remains solidly up. The secondary trend remains bearish. As to their ETFs, and as I expressed here, I have my qualms as to classifying their price action as a secondary reaction. What is clear is that the primary trend is solidly bullish too.

Let’s see what tomorrow will bring. 

Tomorrow my daily commentary will be somewhat delayed. In any instance, you will get it before the open of Friday. 

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

 
Data for October 31, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128,1
Bull market signaled 06/29/2012 136,1
Last close
10/31/2012 141,35
Current stop level: Bear mkt low
128,1




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




3,86% 10,34% 6,25%




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
10/31/2012 166,83
Current stop level: Bear mkt low
149,46




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




3,92% 11,62% 7,41%




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
10/31/2012 31,26
Current stop level: Bear mkt low
25,63




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




8,09% 21,97% 12,84%




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
10/31/2012 25,29
Current stop level: Bear mkt low
17,08




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




15,85% 48,07% 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
10/31/2012 52,9
Current stop level: Bear mkt low
39,56




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




10,74% 33,72% 20,75%

Sincerely,

The Dow Theorist

Monday, October 29, 2012

No Dow Theory Update for Oct 29 and 30: Markets Closed

Due to hurricane, markets have been closed today Monday and it seems they will be closed tomorrow.

So no Dow Theory update in this blog today and tomorrow. 

Let's hope damages will be contained.

Sincerely,

The Dow Theorist.


Friday, October 26, 2012

Dow Theory Update for Oct 26: No changes in trends.



All primary trends remain bullish

There is not much to say in this Dow Theory analysis for today.

The Industrials and Transports closed up. The SPY was mildly down. Technically, nothing has been changed. The primary trend remains bullish and the secondary one bearish.

Since the SPY has much larger capitalization than the Industrials and the Transports, I consider today’s movement as a down movement. Since volume today was larger than yesterday’s, I’d say volume is bearish.

It seems that the markets (especially the SPY) are consolidating. Either the bottom of the secondary reaction is forming or just a rest before the downward thrust resumes.

Gold, silver and their ETFs all closed down today. However, there is no technical change. All primary trends remain bullish.

I continue to keep my eyes glued to the BLV/GLD (long term bond/ gold) ratio. I feel the battle between gold and bonds will give us many clues as to subsequent developments. More on this vital ratio in my post “Dow Theory spells trouble for bonds: Clouds on the horizon. Part II” which you can read here.
 
Today the ratio was slightly up. Long term bonds closed up whereas their kryptonite, gold, closed down. So, for one more day, bonds are dodging the bullet.

Here you have the figures of the markets I monitor. As a reminder, the column “Max Potential Loss” reflect the loss an investor would suffer if, after having bought according to the Dow Theory signals, the markets reverse and hit the Dow Theory stop.
 
 

Data for October 26, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
10/26/2012 141.35
Current stop level: Bear mkt low
128.1




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




3.86% 10.34% 6.25%




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
10/26/2012 165.93
Current stop level: Bear mkt low
149.46




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




3.36% 11.02% 7.41%




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
10/26/2012 31.08
Current stop level: Bear mkt low
25.63




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




7.47% 21.26% 12.84%




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
10/26/2012 24.56
Current stop level: Bear mkt low
17.08




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




12.51% 43.79% 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
10/26/2012 51.22
Current stop level: Bear mkt low
39.56




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




7.22% 29.47% 20.75%



Sincerely,
The Dow Theorist.

Thursday, October 25, 2012

Dow Theory spells trouble for bonds: Clouds on the horizon. Part II



Yesterday, in this Dow Theory blog, I promised you that I’d talk about the BLV/GLD ratio. Here we go.
 

Let’s begin with an old post called “Dow Theory spells trouble for bonds: Clouds on the horizon” which you can read here


Go to that post and look at the BLV/GLD chart that is displayed there. In the upper half of the chart, you can see BLV (the long-term bond); in the lower part, you can see GLD (gold). The red line is the ratio, and the green horizontal line is the critical level of the ratio to be violated so that we can say that the ratio has turned bearish.

As you can see on 09/14/2012 the ratio was dangerously close to the green line. Such date also marked the top for most stocks. Since that date almost everything entered a secondary reaction while long-term bonds staged a modest rally.

The modest rebound of the ratio and of BLV has coincided with gold weakness.

However, subsequent market action has changed the relevant lows (green line). Now they are higher. Following a new secondary reaction, the ratio has established new (higher) significant lows to be broken. Here you have an updated chart:

If the red line (ratio) breaks the green line (latest significant low of the ratio) gold will be really to shine
 
What does this new chart tell me?

I see lower lows in BLV which I have highlighted with red arrows. Not a bullish sign short term.

I also see that even a modest decline may break the lower trend-line of BLV. That wouldn’t be a good omen for BLV.

I also see that the relevant secondary reaction of the ratio has changed. When I wrote the first post on the BLV/GLD ratio on Sept 17, the last reaction lows of the ratio were made in early April 2012. Subsequent market action has given us a new secondary reaction of the ratio, namely the pullback of the ratio from 07/24/2012 to 09/14/2012 which is marked with a blue rectangle.

If the new relevant lows of the ratio, those made at the end of the reaction on 09/14/2012 are broken, then bonds will be in a very delicate situation. I reproduce the conclusions I wrote in the post I mentioned, which remain fully valid:

 Conclusions:

1)     The USD is threatened by the primary bull market in gold.

2)     This may spell trouble for US Treasuries.

3)     The BLV/SPY ratio is bullish for stocks suggesting relative weakness of long dated treasuries over stocks (note: this situation continues to this day)

4)     The BLV/GLD is still bullish suggesting the GLD is still not ready to fully shine or bonds ready to die.

5)     GLD is weaker than SLV and SPY further suggesting that Armageddon is not yet with us.


So this is the situation right now. A break of the ratio below the green line may have dire consequences. This is why I wrote in my post of October 5 that:


Really, you are seeing a dramatic chart that epitomizes the fight of the bonds (essentially the USD) against the power of gold. Who will win? My fundamental instincts say that gold; however, you know I attach relative value to my own fundamental forecasts, and such fundamental forecasts may take long to come to fruition (longer than you can stay solvent, as Keynes would say). Thus, I prefer the technical side of the Dow Theory to guide me in a time horizon of 1-2 years. One thing is clear: The chart reflects an epic battle.


Bottom line: Keep an eye on the BLV/GLD ratio. If the ratio breaks down, it may imply a big movement for gold. Even if the Fed goes frantic buying bonds to support them, and hence, you don’t see a breakdown of bonds but merely a violation of the ratio because, while bonds remain stable, GLD begins to go up, this may imply a huge movement for gold. Gold will not be ready for a real take off until the ratio, irrespective of the price of bonds, gets broken.

Sincerely,

The Dow Theorist

Dow Theory Update for Oct 25: No changes.




Today was a technically dull day.

 Let's get started with our Dow Theory analysis for today.

Stocks were up. Technically, nothing significant occurred. It seems as stocks are trying to bottom, but it is too early too tell and we are unconcerned since we do not trade secondary reactions but, as I always say, we “use” them. Later today, I will post a new article in this Dow Theory blog concerning bonds and gold in which you’ll see how we use secondary reactions to define technically significant points.


The Transports, in spite of yesterday's decline, still look the strongest when we look at price action since 09/26/2012. 
 
Volume was higher today, which is bullish, since it was an up day confirmed by rising volume. So the last two days have seen bullish volume. Still too early to tell. However, I have adjusted the last pivot low, which, after yesterday’s and today’s action is the low made on Oct 24 (yesterday). Such pivot is bearish since its volume was higher than that of the preceding pivot low. Here you have an updated chart.


Last pivot low with bearish volume
As to gold, silver and their miners ETFs, all of them closed up for the day. Technically, nothing has changed and I am still dubious as to classifying the ETFs in a secondary reaction. When I look at the SIL chart I see a trading range not a downward movement. Today SIL closed 3.26% up with the close near the highs of the day. Furthermore, SIL lows were made on 09/25/2012, in spite of all the talk of a new “bear market”, price action has been unable to violate such lows Maybe I am the dumbest analyst on earth but this is not bearish action. If things change I change. When I see such lows broken, then I will be clearly saying that the miners are in a secondary reaction.

Bottom line: Another “boring” day, as it should be for any follower of the Dow Theory. There is nothing wrong with that. We are in the business of protecting capital and, with some skill and luck, making money; not in the business of short-term trading.

For stocks, the primary trend remains bullish. The correction seen so far is normal to modest if we judge according to the empirical record.

As to gold and silver: Primary trend bullish and secondary trend bearish.

As to gold and silver miners: Primary trend bullish; silver miners merely consolidating and I am dubious as to label the movement as a secondary reaction.

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

 

Data for October 25, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
10/25/2012 141.43
Current stop level: Bear mkt low
128.1




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




3.92% 10.41% 6.25%




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
10/25/2012 166.02
Current stop level: Bear mkt low
149.46




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




3.41% 11.08% 7.41%




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
10/25/2012 31.12
Current stop level: Bear mkt low
25.63




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




7.61% 21.42% 12.84%




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
10/25/2012 24.7
Current stop level: Bear mkt low
17.08




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




13.15% 44.61% 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
10/25/2012 51.59
Current stop level: Bear mkt low
39.56




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




8.00% 30.41% 20.75%



Sincerely,

The Dow Theorist.

Wednesday, October 24, 2012

Dow Theory Update for Oct 24: Bearish day




 Stocks: Primary trend remains bullish. Secondary trend bearish.


Let’s get started with our Dow Theory analysis for today.

Today this post in this blog is going to be short, since I just posted some time ago an in-depth study as to whether the gold and silver miners ETFs are experiencing a secondary reaction. You can find the details here
 
The stock market was clearly down today. All the three markets we monitor were down in unison (SPY, Transports and Industrials).

Volume today was bullish since it was lower than yesterday’s and hence negates the downward movement of today. However, as I wrote extensively yesterday, the overall pattern of volume short term (i.e. 2-10 days) remains bearish.

In my previous post, I struggled to qualify the downward movement of the gold and silver miners ETF as a secondary reaction because the total amount retraced didn't  even reach 1/3. This is not the case with stocks. The Industrials have retraced ca. 35% of the previous up leg. The SPY has retraced ca. 32% (which is almost 1/3). So their pullback is a Dow Theory text-book example of a secondary reaction.
 
As to gold and silver and their respective ETFs all of them closed down today, save SLV. Furthermore, SIL refused to violate the lower boundary of its line by just a few ticks. So in spite of the rout we are seeing, the silver universe is displaying good relative strength. I always think that stronger silver is subtly showing that the world is not ending.

Bottom line: Nobody said that secondary reactions are sweet. Even though they can be nerve wrenching, what we are witnessing is “mild” by Dow Theory standards, and it can get even worse (i.e. see a retracement of 70% of the previous primary up leg).

However, the primary trend of stocks, gold, silver and their miners remains bullish.

Tomorrow I will try to talk about the bonds and the vital BLV/GLD ratio. For the time being bonds have dodged the technical bullet that was threatening them.

Here you have the figures of the markets I monitor:

 

Data for October 24, 2012





DOW THEORY PRIMARY TREND MONITOR SPY



SPY
Bull market started 06/04/2012 128.1
Bull market signaled 06/29/2012 136.1
Last close
10/24/2012 141.02
Current stop level: Bear mkt low
128.1




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




3.61% 10.09% 6.25%




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
10/24/2012 164.86
Current stop level: Bear mkt low
149.46




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




2.69% 10.30% 7.41%




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
10/24/2012 30.71
Current stop level: Bear mkt low
25.63




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




6.19% 19.82% 12.84%




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
10/24/2012 23.92
Current stop level: Bear mkt low
17.08




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




9.57% 40.05% 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
10/24/2012 50.06
Current stop level: Bear mkt low
39.56




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




4.79% 26.54% 20.75%


Sincerely,

The Dow Theorist.


Dow Theory special issue: Gold and silver miners ETF secondary reaction




 Are we sure?


In my Dow Theory Update of October 23, I announced that the Dow Theory had signaled a secondary reaction in the gold and silver miners ETFs.

Here you have a chart showing recent price action (until Oct 23)

Caught within a line

The red line is the SIL/GDX ratio which, as you can see, remains bullish for silver.

The last joint highs were made on 09/21/2012. SIL closed at 25.26 and GDX closed at 54.81.

The last minors lows were jointly made on 10/15/2012. Such lows have been violated today. SIL closed at 24.13 and GDX closed at 50.96.

Hence SIL has experienced a 4.44% down move and gold has gone down by 7.02 %

And here comes when Dow Theory gets subjective. I’ve always written that the Dow Theory is not math.

While at first sight 4.44% and 7.02% down movement fully qualifies as a secondary reaction, since the movement exceeds 3%, I have my qualms after adjusting for volatility.

I conducted the following volatility adjustment. Look at the table below:




Daily volt %     Ratio    Min      Movement        Line
SPY 0.58


SIL 1.58  2.724 8.172 13.620
GDX 1.4 2.413 7.241 12.068


The column “Daily Volt %” shows the daily volatility in percentage points (average of the last 30 days).

The column “Ratio” is the ratio of GDX and SLV volatility to SPY’s volatility. Thus, we can see that SIL daily volatility is 2.72 higher than that of the SPY.

The column “Min Movement” reflects the minimum 3% movement we demand for stocks (SPY) times the “Ratio”. It is the adjustment of volatility to compare apples to apples.

And here comes my little surprise. SIL should have experienced a minimum down movement of 8.17% and GDX 7.24%

So if I am strict, and I demand a volatility equivalent to that required for stocks, I must conclude that we are not in a secondary reaction yet. GDX has almost reached the minimum required movement. SIL is far from being 8.17% down.

While these figures are not carved in stone, and we could be somewhat flexible with GDX, I feel that silver is far from being near 8%.

On the other hand, I almost see a secondary reaction from an alternative source: The “line” (trading range).

The blue rectangles show the “lines” being formed in both the GDX and SIL. When dealing with stocks a “line” is formed when during 2 to 3 weeks or longer prices are within a range of ca. 5 per cent or less.

With GDX and SIL, and after adjusting for volatility, we could talk of a line when prices are within a range of ca. 12% or less. The column in the table above "line" shows the volatility adjustment for GDX and SIL.

So it seems that GDX and SIL are within a line.

I also see that on Oct 23, GDX violated the lower boundary of the line. SIL, however, refused to do so.

So we have a very mixed situation: We almost have a secondary reaction if we judge by the decline from the highest highs. We almost have a secondary reaction if we judge by the breaking of the line. However, such violation of the lower boundary by GDX has not been confirmed by SLV.

A third criterion to determine the existence of a secondary reaction is the percentage retracement of the previous up move. I have made some BOE calculations, and SIL has merely retraced 14% whereas GDX has retraced 24.4%. While the 1/3 to 2/3 requirement is not carved in stone, and even Rhea broke these rules on many occasions, I feel that a mere 14% and 24.4% for both ETFs is a too meager retracement.

Given the action of gold and silver I feel tempted to say that SLV and GDX are in a secondary reaction too. However, to be strict, I need to see a little more price action. If silver breaks below its lower boundary, then there will be no doubt that both ETFs are under a secondary reaction.

There is nothing wrong with being cautious. Again, I insist that we are not in the business of trading secondary reactions but to avail ourselves of them to our benefit. 

Furthermore, I want to be honest and not to be proudly sure when the market refuses to be as clear as I wish it to be.  The good think is that primary trends are easier to determine than secondary reactions which as you begin to see are really elusive in real time. What is really important is to be able to think and apply all the Dow Theory tools at our disposal.

Sincerely,

The Dow Theorist