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.