Monday, January 12, 2015

Dow Theory Update for December 12: Primary bull market for SIL and GDX signaled today

Gold and Silver close to signaling primary bull market (but not there yet or never)

US stocks

The Industrials, Transports and SPY closed down.

The primary trend remains bullish, as explained here and here.

The secondary trend is bullish. No secondary reaction yet.

Gold and Silver

SLV and GLD closed up. GLD made a higher closing high; more specifically, GLD bettered the secondary (bullish) reaction closing high (red horizontal line). Nonetheless, SLV did not deign to confirm, and, hence, according to one of the most important Dow Theory tenets, a primary bull market has not been signaled. When or if SLV broke above its secondary reaction highs, then, we would have confirmation, and a new primary bull market. Now it is time to closely follow SLV and GLD.

The chart below gives an update of the current situation. The blue rectangles display the secondary (bullish) reaction against the primary bear market. The red rectangles display the pullback that followed that set up GLD and SLV for a primary bull market. The red horizontal lines show the relevant levels to be jointly bettered for a primary bull market to be signaled.

GLD made higher closing highs unconfirmed by SLV: No primary bull market...yet?

Until confirmation occurs, we cannot change our verdict as to the primary trend, which remains bearish.  

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 were confirmed, the primary bear market was reconfirmed. 

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

The secondary trend is bullish (secondary bullish reaction against the primary bear market), as explained recently here. Furthermore, SLV and GLD completed the setup for a primary bull market, as explained here.

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. 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.

Gold and Silver miners ETFs (GDX and SIL)

As to the gold and silver miners ETFs, SIL closed up and GDX closed strongly up.

Given that today SIL managed to close above the secondary reaction closing highs (top of the blue rectangle extended by blue horizontal line), something which GDX did 4 trading days ago, we can say that today a primary bull market has been signaled for SIL and GDX.

Primary bull market for SIL and GDX signaled. Chart show (horizontal grey lines) percentage retracements

Until recently I was writing that there was no secondary reaction against the primary bear market, since the minimum movement requirement was not met. However, subsequent volatility for the SPY (our benchmark) and SIL and GDX allowed us to re-qualify the minimum movement requirement, and hence, under current volatility conditions, I can confidently say that:

1.      There was a secondary reaction both in time (more than 10 days) and extent (more about the extent below). Such a secondary reaction is highlighted by blue rectangles.

2.      There was a pullback (orange rectangle) that set up SIL and GDX for a primary bull market.

3.      As both SIL and GDX have broken above the secondary reaction closing highs (blue horizontal lines), a primary bull market has been signaled.

I know volatility has been tricky. This is what happens when we depart from the static 3% benchmark which we use for stocks. Readers of this Dow Theory blog know that when dealing with other indices such as SIL, GDX, or SLV or GLD, I perform volatility adjustments. In other words, if the daily volatility of SIL doubles that of the SPY, then I need a +6% minimum movement (2 x 3%) in order to spot a secondary reaction.

It is clear, though, that according to today’s volatility readings, we can identify a secondary reaction, the highs of which have been bettered, and hence, a primary bull market has been signaled.

Furthermore, the current chart configuration also fits with “traditional” Dow Theory (not only with that of Schannep). As you can see on the chart above, the secondary reaction closing highs retraced more than 30% of the preceding primary bear market swing. Of course, I would have liked even more to see a more ample retracement (let's say 50%, which would imply a "stronger" secondary reaction), but the market is never perfect. Thus, even under the traditional Dow Theory, we can say that today a primary bull market has been signaled for SIL and GDX.

Here you have the relevant calculations:


30 days avg daily volatility

SIL 0.02914
GDX 0.03033
SPY 0.007777
SPY 0.007777

Volt ratio 3.746946


Min Move % 11.24084


Sec reac High 10.41

Prim bear mkt low 8.23


Pct Move 26.48846


Our Dow Theory stop should lie at the primary bear market lows, which implies a stop of 26.48% for SIL and 29.53% for GDX. Please mind that the "stop" is just a way of talking, as the exit would be determined by a joint violation of the primary bear market lows, which may or may not occur at that level. However, such percentage figures give us an "estimate" as to where approximately lies our exit in case the trade goes sour. Hence, if I were to open a position on the miners, I would make a small commitment (i.e. if I wouldn't like to lose more than 6% of my equity on any given trade, I would roughly invest ca.  1/4 of my total equity, and to play it safer, I'd divide 1/2 thereof between SIL and GDX. 

It seems something is going on in the precious metals' arena. We have seen strong closes in GLD (not in SLV and SIL) and GDX. The miners are in a primary bull market, and the precious metals themselves are close to it. Furthermore, today the gold and silver miners closed strongly up against weak stocks, which is a bullish accomplishment. So while nothing is carved in stone, and I am keenly aware that it could be a failed signal (this is part and parcel of trading), I bow to the verdict given by the charts when seen under Dow Theory glasses.

The Dow Theorist

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