Dow Theory Update for June 27: Paper gold melting down

 Stocks rally on weak volume

Time to buy the junior gold miners ETF GDXJ?

Mebane Faber of Mebane Faber Research has penned an interesting article named “What happens when you buy assets down 80%”. In the article she analyses the subsequent 3 years return when you buy a sector, industry or country that has declined more than 60%, 70% and 80%. As you can guess the subsequent returns are mind boggling.

The article finishes by hinting the GDXJ (the junior gold miners ETF) might be a good buy right now given that it is extremely oversold.

Of course, buying extreme bottoms, which essentially is mean reversion, has nothing to do with the Dow Theory (which is pure “trend following”). However, I acknowledge that there are times (most) were one has to be a trend follower, and few and far between times were mean reversion may be indicated. Nevertheless, while agreeing with Mebane Faber that GDXJ may be a good buying opportunity, I’d couple the bet on mean reversion with some trend following, and I’d wait until the primary trend for the gold and silver miners turns bullish. No need to rush, even when this time catching a falling knife may seem statistically adequate.

Stocks

The SPY, Industrials, and Transports closed up.

The primary trend and secondary trend is bearish for the reasons explained here, and further explained here.

Today’s volume was lower than yesterday’s, which is bearish as volume contracted. The overall pattern of volume is bearish for the reasons explained here. Here you have a chart that shows lots of red arrows (bearish). You can notice that the last three days of price advance have not been confirmed by volume, which has grown smaller and smaller. The updated chart below shows clearly that the trend of volume is clearly bearish: Ascending when prices decline and descending when prices rally. 

Volume expands in declines and contracts in rallies: bearish

Gold and Silver

SLV closed unchanged, and GLD closed down once again in a climatic way. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

GDX and SIL, the gold and silver miners ETFs closed up. The primary trend is bearish, as explained here and reconfirmed bearish here; the secondary trend remains bearish too.

Eventually, one of these primary bear market re-confirmations will be proven false. In the meantime, it is better not to fight the trend, and wait for a primary bull market signal in order to make a commitment on the long side.

Here you have the figures of the markets I monitor for today, which contain no changes as we are flat.

Data for June 27, 2013
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		11/15/2012	135.7
Bull market signaled		01/02/2013	146.06
Exit June 21		06/21/2013	159.07
Current stop level: Sec reaction lows			161.27
Realized gain %	Tot advance since start bull mkt	Max Pot Loss %
8.91%	17.22%	None.
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