Thursday, December 11, 2014

Dow Theory Update for December 11: Secondary (bullish) reaction against primary bear market in Gold and Silver

Trends for SIL, GDX and US Stocks unchanged

US Stocks

The SPY, the Transports and the Industrials closed up.

The primary trend remains bullish, as explained here.

The secondary trend is bullish and it is too early to signal a secondary (bearish) reaction against the primary bull market.

Gold and Silver

SLV and GLD closed down. The primary bear market was reconfirmed on October 3rd 2014, as GLD finally broke below the June 27th, 2013 primary bear market closing lows (something which SLV had already done on Sept 17, 2014). As lower lows have been confirmed, the primary bear market has been reconfirmed. 

For the reasons I explained here, and more recently here the primary trend remains bearish.

And what about the secondary trend? Well, the secondary trend has just changed. Gold and silver have been rallying since November 5th.

In my Dow Theory Update of December 2, I reported that the time requirement had been fulfilled (more than 10 days of ascending prices). Nonetheless, the extent requirement had not been met. Now, thanks to:

(a) Shrinking 30-day  average of daily volatility for the SPY, and marginally higher volatility for SLV and GLD (which has reduced the volatility ratio, and hence a lower magnitude rally qualifies for a secondary reaction).

(b) And higher prices since December 2nd (thx to them, SLV has retraced ca. 20% of the last primary bear market leg which started on 8/27/2013, and GLD has retraced almost 31%). Hamilton accepted retracements as low as 20% of the last primary movement leg.

we can declare that SLV, and GLD are in a secondary (bullish) reaction against the primary bear market. Please mind that the ongoing movement has sufficient magnitude when we evaluate it either under Schannep’s rules, or even under a more classical Dow Theory standpoint (retracements).

Please mind that I lend more credence to the volatility adjusted movements (which follows Schannep). However, it is nice to see that the “classical” Dow Theory signals the development of a secondary reaction as well. Here you have a chart displaying SLV (top) and GLD (bottom) from the top of the last completed secondary reaction (August 2013, left side of the chart) until today. There you can see the November 5th lows and the current rally (secondary reaction). The horizontal lines show the percentage retracements (more than 30% for gold and almost 20% for silver).

Any way I look at it, I see a secondary (bullish) reaction (right side) against an entrenched primary bear market

When dealing with stock indices, for a rally to be meaningful, the Dow Theory demands a minimum of a 3% in at least two indices. However, since we are dealing with GLD and SLV (quite a different beast), we have to adjust the minimum rally threshold to reflect the greater daily volatility of gold and silver. If we’d satisfy ourselves with a mere 3% rally, we would get lots of false signals given GLD and, especially, SIL larger volatility. It’d be like just demanding a 1% for the SPY or the Industrials. Noise would overwhelm signal.

GLD has rallied 8.38 %, and SLV 12%. Both rallies exceed the minimum volatility-adjust threshold which stands at 5.73% for GLD and 7.78% for SLV. Volatilities have been measured taking the last 30 trading days. More details in the spreadsheet below:


30 days avg volatility
30 days avg volatility

SPY 0.00528

SPY 0.00528
GLD 0.0101

SLV 0.0137

volatility ratio 1.91287879

volatility ratio 2.59469697

Min Move 5.73863636

Min Move 7.78409091

Highest close 118.99

Highest close 16.42
Lowest close 109.79

Lowest close 14.66

current rally % 8.37963385

current rally % 12.005457

As I have countless times said, a secondary reaction is not the real thing and could have short legs. Thus, we just have to sit and wait for further price action to declare a primary bull market, namely:

(a) either at least SLV or GLD undergo a pullback exceeding 5.73% (for GLD) or 7.78% (for SLV), and after such a pullback the closing highs of the ongoing secondary reaction are jointly broken up;

(b) or, if no pullback occurs, then GLD and SLV continue their rally until the highs of the last completed secondary reaction (8/27/2013) are jointly broken up. By the way, once again, I am using the special rule mention by Rhea on page 77 of his book. More about this special Dow Theory rule here.

 In spite of the secondary bullish reaction, the primary trend remains bearish too.

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 bearish.

On a statistical basis the primary bear market for GLD and SLV is old. Almost two years have elapsed since the bear market signal was flashed. However, I am extremely skeptical as to the predictive power of statistics. I prefer price action to guide me, and the Dow Theory tells me that the primary trend remains bearish until reversed. When will this vicious bear market end? I don’t know, and I don’t need to know. I only know that the Dow Theory will see to my being informed punctually when a new primary bull market is born. 

As to the gold and silver miners ETFs, SIL and GDX closed down. The primary bear market was re-confirmed on October 27th, 2014 as explained here. The primary trend for SIL and GDX is clearly bearish, as was profusely explained here and here.

The secondary trend is bearish too, and no secondary reaction has been signaled yet.

The Dow Theorist

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