Friday, February 13, 2015

Dow Theory Update for February 13: Are Gold and Silver miners ETFs under a secondary reaction?

Primary trends have not changed.

If you are interested in knowing how did the Dow Theory fare in 2014 with the precious metals, you might be interested in this post.


The SPY, Industrials and Transports closed up. On Thursday, January 29, the Industrials violated their secondary reaction lows (which puts us very near to a primary bear market signal). On Friday 30, the Transports did so. However, lack of confirmation as the SPY has refused to violate its secondary reaction lows) prevents us from declaring a primary bear market. Some market analysts have declared the existence of a primary bear market. Read my post “It is not a primary bearmarket” in order to understand why the proper interpretation of Schannep’s Dow Theory negates a primary bear market (at least for the time being).

The SPY has for two consecutive days bettered its primary bull market closing highs. The Transports and the Industrials have not confirmed yet. So we cannot say that the primary bull market has been re-confirmed, and hence we cannot the declare the secondary (bearish) reaction as a thing of the past. Here you have an updated chart:

Primary bull market not reconfirmed.

Stocks set up for a primary bear market signal on January 23rd, as explained here. However, a “set up” is not the “real” thing. So we have to wait.

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

The secondary trend is bearish as explained here.

Gold and Silver

SLV and GLD closed up. The primary trend is bullish as explained here.

The secondary trend turned bearish on February 6th, 2015 (secondary reaction against the primary trend) as explained here.

I see on the chart that yesterday and the day before yesterday, GDL made lower closing lows. SLV didn’t deign to confirm, which might be indicative of a likely arrest of the ongoing secondary reaction. Take a look at the chart below.

SLV refuses to go lower: Secondary reaction arrested?

Gold and Silver miners ETFs (GDX and SIL)

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

On January 12, 2015, a primary bull market was signaled. More information as to the details of such a signal here.

The title of this post reads “Are Gold and Silver miners ETFs under a secondary reaction?

To be frank: I am not sure.

As you know, there are two ways for appraising secondary reactions. One is according to the “classical/Rhea” Dow Theory. If we are to follow most “classical” practitioners, then we should demand a minimum time requirement of 3 weeks (15 trading days). Such time requirement has been met, since GDX and SIL declined for 16 days. Furthermore, if I am to appraise secondaries as per the “Rhea/Classical” Dow Theory, then SIL has retraced slightly more than 40% of the previous primary bull market swing. GDX has retraced slightly more than 35% (see chart with retracements –horizontal lines- below). Thus, if I were to appraise SIL and GDX through “classical” Dow Theory lens, I’d say that they are under a secondary reaction.

If I were to apply Schannep’s rules (by the way, as far as I know Schannep has never applied his rules to the precious metals markets, so I am on uncharted waters, and any shortcoming is of my own), then, I’d find the time requirement has been amply met. However, Schannep requires a mere +3% confirmed pullback to declare a secondary reaction (extent requirement).  As you know when I am not dealing with stocks, I perform a volatility adjustment, as a mere 3% movement would be mere noise when dealing with more volatile indices. More about volatility adjustments, here.

As you can see on the spreadsheet below, the volatility-adjusted minimum movement for SIL amounts to -9.67% (so a pullback of 9.67%), whereas for GDX amounts to -9.51. The current pullback has not exceeded -8.97% for SIL and -6.51% for GDX. So, the minimum thresholds have not been reached yet. For reasons to be explained in a future post on this Dow Theory blog, I tend to lend more credence to volatility-adjusted pullbacks that to “classic” percentage retracements.


30 days average daily volatility

SIL 0.0237   GDX 0.0241
SPY 0.0764   SPY 0.0764

Volt ratio 3.22362869

Min Movement 9.67088608

Closing High 17.61
Closing Low 16.03

Pctg decline -0.08972175

So while slightly inclined towards declaring a secondary reaction, I prefer to withhold judgment until I see a little bit more of market action.

What is important is the thought process and how to exert judgment in real time.

Here you have a chart:

A secondary reaction?

Have a nice weekend,


The Dow Theorist.

1 comment:

  1. My apologies for a mistake. The spreadsheet concerning GDX and SIL erroneously included GLD and SLV closing prices, and hence the percentage declines I calculated are wrong. With the proper prices, the declines on Friday, February 13th were:

    -10.57 for SIL and -0.09 for GDX.

    Since GDX did not confirm, the minimum volatility-adjusted decline requirement was not jointly met. SLV’s -10.57% decline was of sufficient magnitude to declare the existence of a secondary reaction. However, lack of confirmation by GDX, prompts me to say that we still have to wait.

    All in all, the conclusions of this post remained unchanged.