Tuesday, June 11, 2013

Dow Theory Update for June 11: Secondary reaction for GDX and SIL explained




 Stocks closed down.


 Secondary trend for GDX and SIL explained

Yesterday I said that the secondary trend for GDX and SIL hat turned bullish, which is tantamount to saying that a secondary reaction against the primary bearish trend is in place.


We know that, under Dow Theory, when dealing with stock indices like the SPY, the Industrials or the Transports, it is necessary to have a minimum move of 3% in two indices. Such a 3% rally must span at least 10 days and be confirmed by two indices.

The same rules can be applied to GDX and SIL, the gold and silver miners ETFs. However, their volatility is significantly greater than that of the stock indices and, accordingly, the minimum move must be proportionally increased.

We take as our benchmark the 30-day average volatility of the SPY (being volatility the standard deviation of daily returns). We also calculate the volatility of GDX and SIL. If we plug the number into a spreadsheet, we obtain the following figures:


Daily volatility
Volt adjustment
Min move
SPY
0.11004
(Ratio)
3%
GDX
0.4414
4.01126863
12.03%
SIL
0.3749
3.40694293
10.22%

We see that GDX and SIL have a significant higher volatility, namely 4 times for GDX and 3.4 times for SIL. This is our ratio, which implies a minimum move of 12.03% for GDX and 10.22% for SIL to be meaningful under Dow Theory.

We know that the last recorded lows were made on 05/17/2013 by both ETFs. The last recorded highs were made on 06/03/2013. The spreadsheet below contains the data:

SIL
Date
Price
Pctg won
High
06/03/2013
14.76

Low
05/17/2013
12.85
14.86%




GDX
Date
Price
Pctg won
High
06/03/2013
30.36

Low
05/17/2013
26.38
15.09%

Thus, we see that both GDX and SIL had a 10 days rally that exceeded the minimum threshold of 12.03% and 10.22%. 

The chart below highlights the secondary reacton against the primary bearish trend with blue rectangles.

Secondary reaction against primary bear market. Will it hold?

While I’d be more satisfied seeing a rally spanning more days (let’s say 3 weeks), two weeks definitely fulfils the minimum time requirement under Dow Theory.

All in all, we have had a rally than both in extension and time can be labeled as a secondary reaction against the primary trend.

So what next? Either the last recorded lows are violated, in which case, the primary bear market will be reconfirmed and the secondary trend will be, once again, labeled as bearish, or after a pullback in at least one index exceeding the minimum threshold of 12.03% and 10.22%, both ETFs break the secondary reaction highs. If such breakout occurs, a primary bull market will be signaled.

However, now it is too easy to tell. I can only say that the secondary trend has turned bullish. I really don’t know whether it will hold or will fizzle, and new lows will be made. In the meantime we observe the market.

 
Stocks

The SPY, Industrials and Transports closed down. The primary trend is bullish, and the secondary trend is bearish.

Today’s volume was higher than yesterday's, which is bearish. Declining prices are being confirmed by expanding volume. Furthermore, volume is expanding in declines in a non climatic way, which further reinforces my bearish inferences. We are far from seeing a climatic bottom. As you can look on the chart below:

1)     Red arrows (bearish volume days) are mounting, which shows bearish pressure.
2)     On 05/22/2013 there was a bearish bar (outside reversal bar) with bearish volume.
3)     On 05/31/2013, there was a bearish pivot low.

Volume is bearish short term. But watch out today's bullish pivot!

There is only one positive as far as volume readings are concerned. Today it was a bullish pivot low. If we compare volume at the last recorded pivot low (5/31/2013), today’s volume was lower, which implies that there was less market participation at the new relative low when compared to 5/31/2013. You can see today’s pivot low encircled with an ellipse and a red line joining together the last two pivot lows. 

So, if we couple volume readings (which are always of secondary importance) with price action (secondary trend bearish), it seems that the odds favor lower prices in the days ahead.

The only thing that could reverse my short term bearish stance is a quick reversal. If soon (let’s say 1-2 days) the market stages a new rally, then I’d become more bullish. If prices stay depressed, the odds favor a continuation of the bearish trend. Accordingly, now is a moment of truth in stocks. If they don’t reverse course quickly, lower prices are a distinct possibility.

Gold and Silver

GLD won ca. 2 tonnes of inventory yesterday. If memory doesn’t fail me, this is the third occurrence in 2013. Is the bleeding being arrested?

GLD and SLV closed down. The primary and secondary trend remains bearish.

GDX and SIL, the gold and silver miners ETFs, closed down. The primary trend is bearish, and, for the time being, the secondary trend is bullish.

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

Data for June 11, 2013






DOW THEORY PRIMARY TREND MONITOR SPY




SPY
Bull market started
11/15/2012 135.7
Bull market signaled
01/02/2013 146.06
Last close
06/11/2013 163.1
Current stop level: Bear mkt low

135.7




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




11.67% 20.19% 7.63%




Alternative Schannep's stoploss: 


Highest closing high
05/21/2013 167.17
16% stoploss from highest closing high
140.423


Max Pot Loss %


-3.86%




DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)



GLD
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%





DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)



SLV
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%





DOW THEORY PRIMARY TREND MONITOR ETF SIL



SIL
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%




DOW THEORY PRIMARY TREND MONITOR ETF GDX



GDX
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%


Sincerely,

The Dow Theorist.

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