Saturday, January 24, 2015

Dow Theory Special Issue: Digging deeper into the primary bull market signal for gold and silver

I promised you that this weekend I was going to give you my take on the brand new primary bull market signal for SLV and GLD.

I’d like to say I find a compelling risk/reward ratio for GLD. The primary bull market was signaled on 1/16/2015 and GLD closed at 122.52. The primary bear market lows (11/5/2014) which are our Dow Theory initial stop are at 109.79 (more about the Dow Theory stop here). This means that our likely exit point lays -10.39% below the hypothetical entry level. Given gold’s daily volatility, which on occasion almost doubles that of the SPY (as of this writing GLD’s 30 days average of the daily volatility is merely 20% higher than that of the SPY, which is unusual), I feel that a stop that lies nearly 10% below our entry point is a very narrow stop (which would be the equivalent for stocks of a stop lying 5-6% below the entry point, which is a narrow stop by Dow Theory standards). Given gold’s volatility and current technical picture, I find that a position in gold offers a good risk reward ratio. We risk ca. 10%, and a gain of 30% is not an outlandish target if we are too judge according to past bull markets in gold.

Similar considerations apply to SLV, although with an even better technical picture:

1)     SLV’s stop (primary bear market lows), lie slightly below percetangewise than those of gold (entry point at 16.95 –close of 1/16/2015, primary bear market lows at 14.66) at ca. -13.51%. However, given SLV higher volatility, it is a narrow stop.

2)     The upside target (though fuzzy targets are) looks even better than for GLD. Why? Because the latest decline (primary bear market swing) was so deep, that merely reaching the last completed secondary reaction highs of 8/27/2013 at 23.59 would imply a +39.17% from our entry point. Of course, if this is not a failed bull market signal (a ca. 30% probability), it is safe to assume that at least the last recorded secondary reaction highs against the now defunct primary bear market are to be touched. Furthermore, and back to Rhea, this is the alternative primary bull market signal (break up/down of the high/lows of last completed secondary reaction). So technically the closing highs of the last secondary reaction against the primary bear market is a very important level, which should act like a magnet (if the primary bull market is a real one). I cannot thing of a real bull market that cannot manage to break up such technical level.

All in all, in this very specific instance, I like the risk reward for both SLV and GLD and the specific chart structure (location of the highs of the last completed secondary reaction, which should be an easy target) confirms me that a 30% price appreciation from the entry point (especially for SLV) is within easy reach.

Here you have a chart displaying price action for SLV (top) and GLD (bottom) since April 2013. There you can see on the left side (blue rectangle) the last secondary reaction against the primary bear market. The blue horizontal lines display the closing highs of such a secondary reaction, which is a very modest target, if we are talking of a “good” (ca. 70% probability) signal. Of course, if the new bull market is for real, then the blue lines should be exceeded with ease.

Nice primary bull market signal: Stops (primary bear market lows) near entry point and "easy" upside target

So while I don’t have a crystal ball, my Dow Theory tools tell me that the looks of this trade are certainly good. A gain of 30% or more is probable, while losses are well contained (primary bear market lows) as explained above.

Have a nice weekend.

The Dow Theorist.

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