Did GLD signal a primary bull market yesterday?
Yesterday I
expressed my qualms as to whether GLD, by breaking up the 07/23 secondary
reaction highs, had signaled a primary bull market.
Let’s go back
to the basics.
The most
common Dow Theory pattern for a primary bull market signal is as follows:
1. Ongoing
primary bear market.
2. Bullish
secondary reaction against the primary bear market. Both indices must fulfill
minimum extent and time requirements (i.e. 8-10 trading days).
3. Pullback
of minimum extent in at least one index; negligible pullbacks are not to be
considered. Thus, when dealing with stoks indexes, anything less than 3% is
disregarded.
4. Breakup
by both indices above the secondary reaction closing highs.
Thus, when
dealing with stock indices we have hard-and-fast rules. One of these rules, which is vital to
qualify pullbacks, is to require a movement exceeding 3%. Anything below this
volatility threshold is considered noise, and should be ignored.
However, when
dealing with gold and silver, I feel we cannot apply the “3% rule” without accounting
for GLD and SLV greater volatility when compared to stock indices. A movement
of 3% is significant for stock indices whose daily volatility normally doesn’t
exceed 0.5%. However, GLD, and more especially SLV, tend to have a much larger
daily volatility. Consequently, I feel that the “minimum volatility threshold of
3%” should be increased accordingly for GLD and SLV.
Of course,
here is where things get tricky. How do I measure volatility? Since we are not
dealing with maths, but merely trying to gauge volatility conditions, I normally
take it easy. I normally take 1 day percentage change (or one day standard
deviation), and I average it for the last 30 days. I calculate it for the SPY
(proxy for the S&P 500), and I do, likewise, for SLV and GLD. If, for instance,
SLV doubles the SPY daily volatility, then the minimum movement, I will demand
for SLV will be 2 x 3 % = 6%.
If you look
at the chart below, we can see that following the 06/27 primary bear market
lows, GLD and SLV staged a rally. Such rally fulfilled the Dow Theory
requirements for a bullish secondary reaction. More importantly, such rally,
after accounting for GLD’s and SLV’s larger volatility, had enough magnitude
and was not “noise." You can find the volatility adjustments I performed here.
![]() |
To the best of my knowledge, the primary trend remains bearish in spite of the solid secondary reaction |
The secondary
reaction highs were made on 07/23. Then we had the awaited pullback which ended
on 08/06. How much did GLD and SLV lose from the 07/23 secondary reaction highs?
Here you have the answer:
GLD
|
SLV
|
Date
|
|
Sec React high
|
129.71
|
19.77
|
July, 23
|
Pullback low
|
123.97
|
18.83
|
August, 06
|
Pctg decline
|
-0.04425256
|
-0.04754679
|
Thus, both GLD and SLV failed to decline by even 5%.
Of course, if
we were dealing with stocks indices and their concomitant lower volatility, we
would have had a “qualified” pullback. However, GLD’s and SLV’s volatility is roughly
2 and 3 times larger than SPY’s, respectively.
I have
calculated volatility in four alternative ways so that I am sure that I am
really making a good assessment thereof. Thus, I have calculated:
1. One day percentage change of prices averaged
for the last 30 days.
2. One
day percentage change of prices averaged for the last 100 days.
3. Three-day percentage change of prices averaged for the
last 100 days.
4. 10-day percentage change of prices averaged for the
last 100 days.
Here you have
the resulting volatility readings:
GLD’s
volatility:
1 day volt
|
1 day volt
|
3 days volt
|
10 days volt
|
|
(30 days avg)
|
(100 days avg)
|
(100 days avg)
|
(100 days avg)
|
|
SPY
|
0.0044
|
0.0054
|
0.0095
|
0.01825
|
GLD
|
0.01
|
0.01
|
0.018
|
0.0385
|
Multiplier
|
2.272727273
|
1.851851852
|
1.894736842
|
2.109589041
|
Minimum Volt
|
6.818181818
|
5.555555556
|
5.684210526
|
6.328767123
|
SLV’s
volatility:
1 day volt
|
1 day volt
|
3 days volt
|
10 days volt
|
|
(30 days avg)
|
(100 days avg)
|
(100 days avg)
|
(100 days avg)
|
|
SPY
|
0.0044
|
0.0054
|
0.0095
|
0.01825
|
SLV
|
0.017
|
0.0159
|
0.0303
|
0.053
|
Multiplier
|
3.86363636
|
2.944444444
|
3.189473684
|
2.904109589
|
Minimum Volt
|
11.5909091
|
8.833333333
|
9.568421053
|
8.712328767
|
If you look
at the “multiplier” you can see that no matter how we cut it, the decline
experienced by GLD and SLV does not reach the minimum volatility threshold (i.e. 5.55% for GLD, and 8.83% for SLV).
Thus, I feel
bound to appraise the current higher highs as merely the continuation of the
secondary reaction against the primary bearish trend. Furthermore, we should
bear in mind that secondary reactions can last some months.
Thus, bearing
in mind that we are dealing with a “young” secondary reaction, and the pullback
experienced does not reach the minimum volatility thresholds (in spite of
calculating 4 alternative measures thereof), I am bound to conclude that:
a) The
higher highs we have seen, merely confirm the secondary trend as bullish. This
is bullish, and suggests that the odds favor higher prices in the weeks ahead
(but not in the “months” ahead, if we were dealing with a primary bull market). It is “bullish” on the second degree, but not “bullish” on the first
degree, which would entail a primary bull market.
b) Thus,
the primary trend remains bearish.
c) From
this new higher level in the ongoing secondary reaction, we can still wait for
a “volatility-qualified” pullback. If after such future qualified
pullback the new higher highs were made, then we would get the primary bull
market signal.
d) As
I wrote here, even in the absence of a qualified pullback, if the secondary
reaction highs of 04/29 (SLV) and 04/30 (GLD) get broken up, we would get a
primary bull market signal (alternative signal). While infrequent, this is
a fully orthodox Dow Theory signal, which was mentioned by Rhea. The levels to
be broken up are shown on the chart with the deep-blue horizontal lines.
I am not
oblivious to the fact that Richard Russell, of the “Dow Theory Letters,"
yesterday declared a bullish breakout on the point and figure chart for GLD.
However, my own understanding of such a chart is that such bullish breakout
portends higher prices in the weeks ahead but lacks the magnitude for a real
primary bull market. Russell sees a price objective of 1400 on the charts. If
he had found a real primary bull market, the price objective should be much
higher. In other words, indirectly Russell may be agreeing with me that GLD is
turning bullish, but not so bullish as to be in a primary bull market. Time
will tell.
Of course,
nothing is written in stone, and subsequent price action could show that I am
being too “orthodox” or inflexible when interpreting the Dow Theory. However, there
is one factor that favors sticking to the rules, namely the existence of an
alternative (and not so distant in the charts) primary bull market signal,
as I have explained under “c” above. I rather prefer to miss some additional
ca. 7% (for GLD), and wait for an undisputed primary bull market signal than
bending my own rules. Furthermore, if GLD and SLV are to enter a primary bull
market, and given their higher volatility, the odds favor a movement that could
well reach 80%. So I am in no hurry.
Finally, we
should consider that the benefit of the doubt corresponds to the primary trend
in force. And this primary trend is bearish.
Of course,
all this talk about the primary trend for GLD and SLV is just for short-term
investment purposes (let’s say a maximum of two years). If one has a secular
view on gold or if one expects a “reset," all this talk about the primary
trend of GLD and SLV is superfluous. If one has a fundamentally-based view on gold,
and this view is bullish (i.e. based on FOFOA) one should stick to physical
gold, as I have explained here.
I am so
meticulous when it comes the proper labeling of SLV, and more importantly, GLD
action, because I know that what happens to GLD’s price in the coming weeks can
be momentous. Here I have to give you some more background.
As you know,
when it comes to my fundamentally-based ideas for gold, I am an ardent follower
of blogger FOFOA. If FOFOA is right, and as ANOTHER put it (to know more about “ANOTHER,"
go to FOFOA’s blog) “all paper will burn,"
which means, that eventually paper and physical gold will decouple. The
consequences will be nasty for paper gold holders. Paper gold may lose lots of
its value, thus reflecting the lack of physical to back it, whereas physical
gold, after a closure of the markets, will reemerge with prices beyond belief
(there is talk of USD 55,000 in current purchasing power).
While I feel
that FOFOA’s construction is fundamentally right, and that every individual
subscribing to his thesis should be the owner of physical gold and not trade it
(not even under the Dow Theory), it is clear to me that the fortunes of paper
gold tell me a lot as to whether the decoupling is nigh or not. When/if
paper gold nears its demise, we should see a vicious primary bear market set in
(or at least, in case silver trends up), a blatant lack of confirmation by GLD.
On the other
hand, if the time is not ripe yet for the advent of “physical-only” gold, we
could see (paper) gold entering a new primary bull market, as the TPTB bought
more time.
Of course, a
primary bear market in paper gold does not necessarily imply that
“physical-only” gold markets are near. What if it were a primary bear market
for both paper and physical gold? What if the Chinese start dishoarding? Then
we could get a primary bear market in both paper and physical gold. Thus,
declining prices are not useful in order to time the advent of physical-only
gold, or “freegold” as labeled by FOFOA. While declining paper gold prices
makes us, followers of FOFA, suspect that the “end is nigh," we could be
wrong.
On the other hand, strong
paper gold displays a powerful message, namely: Paper gold is not ready to die.
If TPTB managed to control the flow of gold, they could pull it off once again.
I derive an
additional cue from GDX and SIL, the gold and silver miners ETFs. FOFOA
contends that gold miners will not be allowed by governments to benefit from
the windfall of USD 55,000 gold. Thus, he expects the miners to severely underperform
physical gold. If the emergence of “freegold” were imminent, I’d expect GDX
(and even SIL, for reasons to be learn at FOFOA’s) not to be in a raging bull
market. A primary bull market for GDX and SIL tells me that the status quo is not in jeopardy, which by
implication means that paper gold is not ready to die.
Thus, if both
GDX and GLD were in a powerful primary bull market, I’d tentatively
conclude that paper gold has been given a breather, which implies that the end
is not nigh…yet.
Of course,
I’d never trade around a physical position in gold. If one believes that gold
is predestined to go to the moon, I’d never run the risk of trying to “time” my
entry, as it may prove to be too late (lack of physical supply or closure of
markets). Thus, all my musings about physical gold, GLD, GDX, etc. are merely
personal reflections as to the timing of an event which I am not interested to
“time”, namely the birth of “freegold”.
Stocks
The SPY, and
Industrials closed down. The Transports closed up.
The secondary
turned bearish. Therefore, we have an ongoing secondary reaction against the
primary bullish trend, since:
a) Two
indices (the Transports and the Industrials) have lost more than 3% since the
last recorded bull market closing highs (08/01 Transports, and 08/02
Indutrials). The SPY has lost -2.995% since its 08/02 closing highs, which
amounts to -3%, even though it was not necessary for the SPY to confirm, as
just two indices are enough.
b) The
decline lasted more than 8 trading days, more than ten calendar days, and has
even reached the threshold of 10 trading days. So the time requirement has been
fulfilled any way we cut it.
Accordingly,
the movement we have seen since the last recorded primary bull market highs is
now labeled as a secondary reaction against the primary bull market. The
secondary trend is accordingly bearish.
Look at the chart below. The orange rectangles highlight the ongoing secondary reaction against the primary bull market.
Today’s
volume was higher than yesterday’s. Since stocks closed down, expanding volume
has a bearish connotation. For the reasons I gave here, I’d say
that volume is bullish in spite of the last two days of bearish volume. Furthermore,
the last breakup of 08/01 was a bullish pivot, as was explained here.
Gold and Silver
GLD and SLV closed up. For the reasons I have given
above, I feel the primary trend remains bearish. Here I explained
the primary bear market signal. The trend was reconfirmed bearish, as explained
here. The
secondary trend is bullish (secondary reaction against the primary bearish
trend), as explained here.
GDX and SIL closed down, and, unlike GLD and SLV, are
unambiguously in a primary bull market under the Dow Theory, as explained here and here. The
secondary trend is bullish as well.
Later today,
or tomorrow, I will post a new episode of my saga "Face off: Schannep versus "classical" Dow Theory".
Readers of this blog stay tuned, as I will deliver groundbreaking information.
Here you have the figures for the SPY, GDX and SIL
which represents the only markets with suggested open long positions.
Data for August 16, 2013 | |||
DOW THEORY PRIMARY TREND MONITOR SPY | |||
SPY | |||
Bull market started | 06/24/2013 | 157.06 | |
Bull market signaled | 07/18/2013 | 168.87 | |
Last close | 08/16/2013 | 165.83 | |
Current stop level: Bear mkt low | 157.06 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
-1.80% | 5.58% | 7.52% |
DOW THEORY PRIMARY TREND MONITOR ETF SIL | |||
SIL | |||
Bull market started | 06/26/2013 | 10.59 | |
Bull market signaled | 08/14/2013 | 15.36 | |
Last close | 08/16/2013 | 15.8 | |
Current stop level: Primary bear mkt low | 06/26/2013 | 10.59 | |
Unrealized gain % | Tot advance since start bull mkt | Max Pot Loss % | |
2.86% | 49.20% | 45.04% | |
DOW THEORY PRIMARY TREND MONITOR ETF GDX | |||
GDX | |||
Bull market started | 06/26/2013 | 22.22 | |
Bull market signaled | 08/14/2013 | 28.7 | |
Last close | 08/16/2013 | 29.79 | |
Current stop level: Primary bear mkt low | 06/26/2013 | 22.22 | |
Unrealized gain % | Tot advance since start bull mkt | Max Pot Loss % | |
3.80% | 34.07% | 29.16% |
Sincerely,
The Dow Theorist
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