Wednesday, April 3, 2013

Dow Theory Update for April 3: Meltdown day or precious metals capitulation?

 Stocks and precious metals in free fall


 Let's get started with our Dow Theory commentary in a day full of Dow Theory relevant events.


The SPY, Industrials and Transports closed down. The primary and secondary trend remains bullish under Dow Theory.

Here you have an updated chart showing volume relevant events:

Volume continues bearish
As followers of this Dow Theory blog know, I have been quite bearish on volume for some weeks. The situation has become even more bearish, since:

1.      Yesterday was a bearish pivot day. Yesterday the market made higher highs. When we compare volume yesterday with volume at the last recorded pivot high (03/14/2013), we see that we had lower volume yesterday. This is bearish as it implies that higher highs didn’t attract market participation.

2.      Today has been a reversal high volume bar. The market failed to exceed yesterday’s high and went down on increasing volume. Furthermore, on 03/15/2013 we had another bearish reversal bar (which implies that selling pressure prevails). 

3.      Today’s volume has been larger than yesterday’s, which is bearish as declining prices were met by expanding volume. If we look at the last few weeks, we see more red arrows (bearish volume) than blue arrows (bullish volume).

However, we shouldn’t get too excited with volume patterns. As I wrote here:

[t]he following caveats come to my mind:

1.      Volume readings merely increase the odds of something happening (i.e. development of a secondary reaction). However, trends and secondary reaction are made by price action not by volume. Volume merely qualifies the trend.

2.      Excessive volume bearishness tends to beget a short-lived counter movement (i.e. a minor rally). (...). 

3.      All these musings concerning volume are of barely any interest for investors along the primary trend. However, I am of the opinion that there is a golden rule of markets that rewards the knowledgeable and punishes the unprepared. So, even if I am more concerned with the primary trend, I feel the more I understand markets (and volume), the better. Furthermore, investing is so trying that the more I understand the intricacies of the ongoing trend, the less prone I will be to panic when the going gets tough (as it will inevitably happen sooner or later). Knowledge is power.

Gold and silver

GLD by making lower lows finally violated the last recorded lows, thereby confirming SLV. Now both precious metals are well below the last recorded lows and, hence, the primary bear market has been reconfirmed. Here you have an updated chart.

Primary bear market in gold and silver re-confirmed
Gold and silver action in the last few months has taught us a valuable lesson concerning the importance of technical analysis (the Dow Theory patterns in this case) and the importance to give the benefit of doubt to the existing trend. In many instances, we were tempted to declare a change in the secondary trend. However, as neither rally managed to qualify as such as per our technical rules (i.e. 6% for silver and 3% for gold), and in spite all siren’s songs (i.e. GLD inventory readings, Jim Sinclair’s predictions, etc.), we stuck to our rules and maintained that the primary and secondary trend was bearish.

Thus, what I wrote on January 26, 2013 seems now more valid than ever:

Even though I shroud myself with a technical blanket, I also have feelings and, to my utter dislike, fundamental opinions (…)

Mr. Sinclair (of Mineset), legendary trader and mine developer is of the opinion that the current meltdown is sheer manipulation. Thus, he urges his readers not to sell out and hold. He gives plenty of reasons which, at least for the short and medium term, make sense. Thus, he is of the opinion that gold and silver will go up (at least $ 3500), and the miners will enormously benefit from it.

On the other hand, renowned blogger FOFOA  is of the opinion that gold will go up but to such a huge extent that it will become too precious. So valuable that the miners will face governmental confiscation (or something akin to this like a 95% tax on windfall profits). FOFOA doesn’t rule out gold going as high as $ 55,000 (in current value terms). However, such massive revaluation of physical gold will spell trouble for silver and for all kinds of gold and silver miners. If the FOFOA scenario plays out, then the primary bear market signal is the real thing.
So fundamentally, I am in a quandary. Two persons I highly respect, both with an articulate discourse, are in the antipodes. Whom should I follow fundamentally?

However, the technical beast that inhabits in me tells me to heed the Dow Theory signals. If FOFOA is right and eventually the stocks miners will plummet, then the current bear market signal is a faithful harbinger of things to come, If Sinclair is right, then the current signal will eventually prove to be a failed signal. In such a case, sooner or later we will get a primary bull market signal (hopefully at a lower price), and we will ride the new bull. If Sinclair is right mining stocks should go up manifold ($ 3500 gold as he predicts, would imply mining stocks going up at least four fold from current prices). Should stocks prices go up four fold, then we shouldn’t worry about realizing some minor losses (or getting back aboard a bit late), since they pale by comparison to the huge rewards waiting for us. To some extent, I see the small realized loss or the likely small gain lost in the future by re-entering the trade later when a new primary bull signal is announced as the small risk premium to pay in case mining stocks take a big nosedive. If eventually Sinclair is right, the Dow Theory will give us ample opportunity to extract a good chunk of the future bullish trend. However, if something nasty is around the corner for such stocks, the best thing to do is to heed the primary bear market signal and get out.

SIL and GDX closed down. The primary and secondary trend remains bearish.

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


Data for April 3, 2013


Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
04/03/2013 155.23
Current stop level: Bear mkt low

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

6.28% 14.39% 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
01/24/2013 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
01/24/2013 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.

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