Primary bear market remains unchanged
Today is one of these scarce days when a Dow Theory
relevant event occurred. However, since one never knows which day will be the relevant one, the Dow Theorist is advised to keep an eye on the markets on a daily basis. Read below our comment for SIL and GDX (the gold and
silver miners ETFs).
US stocks
The Industrials closed up. The
Transports and the SPY closed down. Two days ago the Transports managed to
better the last recorded closing highs (December 31). However, the SPY and
Industrials failed to confirm. The longer price action remains below such highs
for the SPY and Industrials, the higher the odds for a secondary reaction to
develop.
The primary trend was
reconfirmed as bullish on October 17th and November 13th, for the
reasons given here and here.
Gold and Silver
SLV, and GLD closed up. For
the reasons I explained here, and more
recently here, I feel the primary trend remains bearish. Here I analyzed
the primary bear market signal given on December 20, 2012. The primary trend
was reconfirmed bearish, as explained here. The
secondary trend is bullish (secondary reaction against the primary bearish
trend), as explained here.
As to the gold and silver
miners ETFs, SIL and GDX closed up. The primary trend is bearish, as was
profusely explained here and here.
The secondary trend turned bullish today. I have been warning in the last few days (i.e.
here) that we were nearing a secondary (bullish) reaction for SIL and GDX.
Today, under the Dow Theory, we can say that a secondary reaction has been
signaled. Why?
1)
Both ETFs have been rallying
since 12/23/2013, which is more than 10 days.
2) Both ETFs have rallied more
than their minimum volatility thresholds, namely, SIL 16.27% and GDX 14.41%,
whereas a minimum movement of 11.27% was required for SIL and 12.53% for GDX.
Therefore, both the time and extent requirements for a secondary reaction have been met.
As readers of this Dow Theory
blog know, when one is dealing with stock indices such as the Industrials, the
minimum meaningful movement to consider the existence of a secondary reaction is
3%. However, given that SIL and GDX are much more volatile than indices like
the Transports or Industrials, we have to conduct a volatility adjustment that
takes into account their higher volatility. In other words, whereas a 3% movement
in stock indices is meaningful and tells us that something is happening; such a
movement in SIL or GDX is merely noise given their higher daily volatility.
To calculate the volatility
multiplier we take the 30 days average of the daily volatility (percentage
change) of the SPY. We do, likewise, with SIL and GDX and divide SIL and GDX
volatility by SPY’s volatility. Once we have the multiplier, we apply it to 3%
(the minimum volatility for the SPY for a meaningful movement) to determine the
minimum movement for SIL and GDX. The spreadsheets below give you the full
math:
SPY
|
0.004508
|
SPY
|
0.004508
|
|
SIL
|
0.016934
|
GDX
|
0.018831
|
|
Mult
|
3.75643301
|
Mult
|
4.17724046
|
|
Min mov
|
11.269299
|
Min mov
|
12.5317214
|
Thus, SIL should move at least
11.27% and GDX 12.53% for a movement to be relevant under the Dow Theory.
Let’s see how much have SIL
and GDX rallied from the 12/23/2013 lows:
SIL
|
GDX
|
|
Rally high (Jan 17)
|
12.29
|
23.33
|
Prim Bear Mkt low
|
10.57
|
20.39
|
Total advance |
0.16272469
|
0.14418833
|
So both SIL and GDX have amply
exceeded the minimum movement. Since it has been a confirmed rally, and this rally has lasted enough time and has had sufficient magnitude, we conclude that the
movement since the 12/23/2013 lows is a secondary reaction against the primary
bear market. By the way, the volatility adjustments I calculate when I am not
dealing with stocks indices did indeed keep me on the right side of the market
during 2013, as many false signals were avoided. If you are interested in
seeing the Dow Theory out performance in SIL, GDX and gold and silver in 2013, please
read this post.
Please mind that the primary
trend remains bearish. We are just witnessing a secondary bullish reaction
against a primary bearish trend. Of course, the first step towards a primary
bull market is a secondary reaction against the primary bear market; however,
we shouldn’t underestimate the power of the primary trend. So the ongoing
secondary reaction merely tells us that the odds favor in the weeks ahead somewhat
higher prices (that is the continuation of the reaction) within the primary bearish trend. Here you have an updated chart:
By the way, while this does
not belong strictly to the Dow Theory arsenal, it is noteworthy that today both
SIL and GDX have closed above the red horizontal line (which was the level at
which a primary bear market was signaled a couple of months ago. I find this is
a bullish accomplishment that slightly skews the odds in favor of the
continuation of higher prices in the days ahead.
Readers of this blog know that
secondary trends are not dependable enough to be traded (at least not by me),
and that we align ourselves only along the primary trend. Accordingly, I don’t
advocate for any long position in SIL and GDX yet.
Observation: Now we have both gold and silver and their miners in a bullish secondary
trend. While this does not amount to a primary bull market; it is certainly
pleasant to see that now the whole precious metals' universe seems to be in
unison. I like to see inter-market confirmation.
Here you have the figures for
the SPY which represents the only market with a suggested open long position:
Data for January 17 , 2014 | |||
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 | 01/17/2014 | 183.63 | |
Current stop level: Secondary reaction low | 165.48 | ||
Unrlzd gain % | Tot advance since start bull mkt | Max Pot Loss % | |
8.74% | 16.92% | 2.05% |
Sincerely,
The Dow Theorist
No comments:
Post a Comment