Thursday, January 24, 2013

Dow Theory Update for Jan 24: Primary bear market signaled for Gold and Silver ETFs (GDX and SIL)

Stocks holding their own.

Let’s begin our analysis of the markets under the prism of the Dow Theory.

The SPY, Industrials and Transports closed up, thereby making a new confirmed high, which is bullish.

Volume was higher than yesterday’s and since, overall (and in spite of NASDAQ action), the major indices closed up. This makes it a bullish volume day. Is a secondary correction at hand?

The primary and secondary trend for stocks remains unambiguously bullish.

Today’s real action was in the precious metals arena.

Gold (GLD) and silver (SLV) closed down. Market action seems to confirm my reluctant stance to declare the secondary trend as bullish when gold staged a modest rally which didn’t even reach 3%. Until this happens, we must conclude that the primary and secondary trend of both precious metals remains bearish.

As to SIL and GDX (the silver and gold miners ETFs) they closed down today. Not only did they close down, but they made significant lower lows. Furthermore, such new lows, as far as I understand, violated the significant lows of 11/15/2012 and 12/05/2012 (secondary reaction lows) and thus has given us a primary bear market signal.

Of course, to pronounce such a verdict we must be sure that the 11/15/2012 and 12/05/2012 lows were the lows of the correction which, while simple in hindsight, is not so easy to ascertain in real time. We never know, which are the relevant lows until we see an upward move off the lows that qualifies as a “rally” under Dow Theory. As you may know by now, when dealing with the Industrials, Transports or SPY the minimum movement to qualify as a “rally” must exceed 3%. When we adjust for SIL and GDX volatility, we demand higher values for an upward movement to be labeled as a significant rally.

In my post of November 29th,  2012, I performed the volatility adjustment for GDX and SIL, and I concluded that the upward movement we were then living didn’t qualify as a rally as not even one ETF deigned to exceed the volatility threshold. I encourage you to see the full calculations here.
On November 29th, I rightly concluded (at that time that was the correct decision, so I am not retrocasting) that the upward movement off the 11/15/2012 lows didn’t qualify as a rally and “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

However, on 12/12/2012 SIL extended its upward movement by closing at 23.50. Since its 15/11/2012 lows stood at 21.99, this amounts to a 6.86% upward movement. If we look at the volatility adjustments, I conducted for silver, we see that the minimum threshold was 6.71% (or even less as volatility was declining during those days). Thus, on 12/12/2012 a proper rally for SIL existed under Dow Theory.

GDX refused to make higher highs and hence never staged a proper “rally” under Dow Theory. However, as I have written copiously in this Dow Theory blog, for a relevant rally to exist we only need one index. Here you have the explanation:

Rhea wrote that the principle of confirmation becomes more important the longer the time frame. In other words, a primary bull market signal is meaningless without confirmation. The same basically applies to secondary reactions. However, when it comes to rallies (or small pullbacks in bear markets) which I would label “tertiary movement," some Dow Theorists are lukewarm with the principle of confirmation.
Here are two quotes from Hamilton (contained in Rhea’s master book “The Dow Theory”) which are illustrative:

“…Dow’s theory….stipulates for a confirmation of one average by the other. This constantly occurs at the inceptions of a primary movement, but is anything but consistently present when the market turns for a secondary swing
“This illustration serves to emphasize the fact that while the two averages may vary in strength they will not materially vary in direction, especially in a major movement. Throughout all the years in which both averages have been kept this rule has proved entirely dependable. It is not only true of the major swings of the market but it is approximately true of the secondary reactions and rallies. It would not be true of the daily fluctuation (…)”

So from the two quotes we can deduct that a rally may be considered in itself without requiring confirmation. While this is not carved in stone and confirmation is always welcome, when we talk of a tertiary movement, we can be a little less demanding with the principle of confirmation. Please mind that one of the quotes even questions the inflexible application of the principle of confirmation to secondary reactions. As far as I know contemporary Dow Theorists like Russell, and Schannep have not gone that far and require confirmation for secondary reactions. So do I.

However, Schannep has done away with the requirement of confirmation when it comes to the rally that follows the secondary reaction in a bull market (same reversed in a bear market). Bearing in mind the preceding quotes, I don’t find anything irregular in it. However, those followers of the Dow Theory that also demand confirmation even for such rallies are not wrong either. Both interpretations may be fully reconciled with the Dow Theory.

Thus, once we had a “proper” rally, the 11/15/2012 lows where the lows to monitor for SIL. For GDX, the final secondary reaction lows were made on 12/05/2012 at 45.35. GDX violated its secondary reaction lows on 12/20/2012. However, SIL refused to do so, and hence we had to wait until 01/23/2013. SIL by violating its 15/11/2012 secondary reaction lows confirmed GDX’s prior violation of 12/05/2012 and thus a new primary bear market was signaled.

Of course, the primary bear market was in force since 09/21/2012 (last confirmed highs in the primary bull market swing), and the ongoing secondary reaction is to be re-classified now as the first leg or swing of the new primary bear market.

As always, we don’t know whether this is a fake signal or the real thing. What we do know is that technically GDX and SIL are in a primary bear market.

I plan to write more about the new primary bear market signal in the coming days.

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

Data for January 24, 2013


Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
01/24/2013 149.41
Current stop level: Bear mkt low


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

2.29% 10.10% 7.63%


Bull market started
05/16/2012 149.46
Bull market signaled
08/22/2012 160.54
Exit December 20
12/20/2012 161.16
Current stop level: Sec React low
11/02/2012 162.6

Realized Loss % Tot advance since start bull mkt

0.39% 7.83%


Bull market started
06/28/2012 25.63
Bull market signaled
08/22/2012 28.92
Exit December 20
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
Exit January 23
01/23/2013 21.69
Current stop level: Sec React low
11/15/2012 21.87

Realized Loss % Tot advance since start bull mkt Max Pot Loss %

-0.64% 26.99% 27.81%


Bull market started
05/16/2012 39.56
Bull market signaled
09/04/2012 47.77
Exit January 23
01/23/2013 44.56
Current stop level: Sec React low
12/05/2012 45.35

Realized Loss % Tot advance since start bull mkt Max Pot Loss %

-6.72% 12.64% 20.75%


The Dow Theorist.

No comments:

Post a Comment