Thursday, February 19, 2015

Dow Theory Update for February 19: Secondary reaction for silver and gold miners ETFs signaled today

The Industrials and Transports have not confirmed SPY’s higher highs yet

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


The SPY, Industrials, and Transports closed down. On Thursday, January 29, the Industrials violated their secondary reaction lows. On Friday 30, the Transports did so. However, lack of confirmation (as the SPY 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 bear market” 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 three consecutive days (until the day before-yesterday) 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 declare the secondary (bearish) reaction as a thing of the past. One of the tenets of the Dow Theory is that the longer non confirmation persists, the higher the odds for a trend reversal. Here you have an updated chart:

Lack of confirmation might be indicative of a trend reversal

 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. Such a set up will be "deleted", once the SPY's higher highs get confirmed.

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 down. 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. The secondary reaction continues running its course. SLV rallied modestly (from February 6 to February 13). However, such rally was a meager ca. 3%, which in volatility-adjusted terms, is not enough to set up SLV and GLD for a primary bear market signal. Had SLV have rallied by a more ample amount (let’s say at least more than 5.4%, which is one recent volatility-adjusted reading, as you can see here), then the set up would have been completed.

Thus, the subsequent violation of the February 6th closing lows did not flash a primary bear market signal. We still have to wait for a rally of sufficient volatility-adjusted magnitude for SLV and/or GLD (let’s say ca. more than 5.4% for SLV and 3.85% for GLD, as per recent volatility readings) so that the set up for a primary bear market signal is completed.

In the absence of such a rally, a primary bear market would be signaled if both SLV and GLD violated their November 5th, 2014 closing lows (primary bear market lows). Please mind that there are several ways of declaring a primary bear market under the Dow Theory. The most common and classical sequence "primary bull (bear) swing, correction, rally (pullback) and final breakout", is just one of the ways of declaring a change of primary trend. More information about alternative primary bear (bull) market signals, on my yesterday’s post, which you can find here.

Gold and Silver miners ETFs (GDX and SIL)

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

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

For the reasons explained here, I was doubtful as to whether we could declare a secondary (bearish) reaction for SIL and GDX yet. Yesterday I wrote that any decline below the 2/17/2015 closing lows would unambiguously prompt me to declare the existence of a secondary reaction. Well, today such lows have been jointly violated. Furthermore, GDX has declined -10.46% from its primary bull market highs, which in volatility-adjusted terms is relevant, as it has confirmed SLV’s decline. Read my recent posts to become more acquainted with the entrails of this secondary reaction (which has not been an easy one to ascertain).

All in all, by all standards we can declare that a secondary (bearish) reaction against the ongoing primary bull market in SIL and GDX has been signaled today.

Here you have a chart:

Orange rectangle (right) shows ongoing secondary reaction which has been signaled today

Now we have to wait for subsequent market action.

The Dow Theorist.

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