Secondary trends changed (bullishly) in gold and silver
Well, it seems that trends in all markets are changing.
Today there is plenty of information to digest. Stocks (both US and Chinese)
undergoing a secondary reaction against a primary bear market. I apologize to
my readers for not having given updates as to the secondary reactions, since my
time has been in short supply (as usual). However, I have not missed the “meat,"
which is primary bull and bear market signal. After all, secondary reactions
are our “pivot” or reference points which we use to determine whether the
primary (the important one) trend is bullish or bearish.
Chinese Stocks
On 08/24/2015 both the FXI and HAO made lower closing
lows. From that point, the HAO started a rally whose closing high was made on
09/16/2015 (closing price 24.18). The HAO rallied for 16 trading days.
FXI made a lower closing low on 09/04/2015 which was not confirmed by the FXI. Lower lows without
confirmation tend to show that the ongoing trend (bear market in this case)
might be running out of steam. From such lows the FXI rallied for 7 days until
09/16/015 (closing price 24.18), thus confirming the rally undergone by
HAO.
All in all, lower lows in the direction of the primary
trend (bearish) were not confirmed, whereas higher highs in the direction of a
counter movement were confirmed. While this does not change the primary trend
(bearish), it is a warning sign that things might change.
Therefore, both the FIX and HAO have rallied for an
average of (16+7)/2 = 11.5 days.
This is enough time (more than 8-10 trading days) to
label such a rally as a secondary reaction
against the primary bear market.
What about the extent requirement necessary for a
secondary reaction to exist?
As you can see in the spreadsheet below the FXI
advanced by 11.79% and the HAO by 13.61%. You know I like to adjust for
volatility, as the minimum 3% movement dictated by the Dow Theory was thought
for US stocks, which are less volatile than Chinese stocks. More about
volatility adjustments here.
I performed the volatility adjustment the following
was. I took the exponential moving average of the daily percentage change of
the FXI/HAO. I calculated the 30-day exponential average of such daily changed
and compared it with its equivalent in the SPY. Accordingly, the minimum
movement for the FXI was 5.34% and for the HAO 7.05%. They were amply exceeded.
FXI
|
HAO
|
||||
HIGH
|
09/16/2015
|
37.54
|
09/16/2015
|
24.18
|
|
LOW
|
09/04/2015
|
33.58
|
8/24/2015
|
21.33
|
|
% change
|
0.11792734
|
0.13361463
|
|||
Min adjusted volt move
|
5.34
|
7.05
|
|||
All in all, both the time and extent requirement have
been met, and hence unambiguously we can declare a secondary bullish reaction
in Chinese stocks, all the gloom and doom notwithstanding.
Things get more interesting when we see what happened
after the 9/16/2015 closing highs. Both Chinese ETFs declined. The decline
amounted to -7.85 for the FXI and 5.58% for the HAO, which more than exceeds
the minimum move in volatility adjusted terms.
Such a pullback (which need not be confirmed, more
about it here), set up stocks for a primary bull market signal. Now, if the
9/16/2015 closing highs are jointly bettered on a closing basis, a new primary
bull market would be signaled.
Last Friday10/2/2015 HAO closed above its secondary reaction
high of 9/16/2015. Today, FXI has confirmed, and hence a primary bull market
has been signaled.
Here you have an updated chart (the blue rectangles
display the secondary reaction and the orange ones the pullback that followed
that set up Chinese stocks for a primary bull market signal).
 |
| Primary bull market for Chinese stocks signaled today |
Furthermore, this signal is a rather “tradable” one,
since our stops lay at the last primary bear market lows which are located at “reasonable”
levels. By “reasonable” I mean that our Dow Theory trailing stop is a quite
narrow one (around 11.79% and 13.36%). It has nothing to do with the “Chinese
situation” I referred to here. More about the Dow Theory trailing stop, here.
I don’t know whether it is going to be a failed signal
or something more important is going on. What I know is that from a Dow Theory
perspective things have technically changed. Furthermore, I also see that the
precious metals universe seems to be getting bullish. Are the markets seeing
signs of reflation worldwide?
What happens to Chinese stocks partially affects the behavior
of US stocks, and since the latter have also set up for a primary bull market
signal, we better keep paying attention to both countries.
US STOCKS
The Industrials broke above its secondary reaction
closing highs, unconfirmed by the
SPY and the Industrials. So, no primary bull market yet.
The secondary trend is bullish (secondary reaction
against primary bear market), as explained here.
Furthermore, US stocks set up for a primary bull
market signal, as explained here:
If the ongoing rally managed to jointly better the
9/16/2015 closing highs (please mind that the Chinese stocks made their last
highs on the same date), a primary bull market would be signaled.
The
secondary trend is bullish, as SLV and GLD are in the midst of a secondary reaction
against the primary bear market.
Off
the closing lows of 08/03/2015 SLV rallied by 6.85% until 08/12/2015. It rallied
for 7 trading days. Off the closing lows of 08/05/2015 GLD rallied by 6.92%. So
GLD rallied for 12 trading days. The average time for the rally was (7+12)/2= 9.5 days. While I’d have been
happier seeing SLV rallying a little bit longer, I feel that we can accept the “time”
requirement for a secondary reaction as fulfilled.
On
the other hand, the extent
requirement has been fulfilled too. I don’t have the time (and neither have my
readers, as this is a long post) to give you the details concerning the
volatility-adjusted measurements, but both rallies in the vicinity of 7% amply
exceed the minimum movement.
Nevertheless,
it is not the most “perfect” secondary reaction, since the
modest rally that emerged from the last confirmed recorded lows (8/3/2015, and 8/5/2015)
was affected by a non-confirmation and divergence, namely, GLD was going up and
SLV refused to confirm and even started to decline. Thus, given that the time requirement was barely met and
that the latest highs made by GLD were not confirmed by SLV, I feel it is a slightly debatable secondary reaction.
In
spite of all my qualms, there are the following aspects which weight on the
bullish side:
a)
On August 26, 2015 SLV made a lower closing low, unconfirmed by GLD. Thus, a new primary bear market low,
unconfirmed, increases the odds for a reversal of trend, at least of secondary
proportions (which gives more validity to the secondary reaction I reluctantly
spotted).
b)
Furthermore, the sequence higher high unconfirmed followed by lower low
unconfirmed tends to be finally bullish when the last recorded highs are
finally jointly broken up. Many
traders get caught on the wrong foot (when first long, and were whipsawed, then
reversed and went short, to be forced to cover), and the final move tends to be
strong. We saw this in Chinese stocks in 2014, when a higher high unconfirmed
and a lower low unconfirmed set up such stocks for an explosive up move (ca.
30% with no intervening breather, namely a secondary reaction after the
breakout). As I wrote here:
“So the Chinese stocks market was caught with a double
non confirmation. On the one hand, there was not enough bullish thrust to
re-confirm the primary bull market; on the other hand, there was not enough
bearishness for a primary bear market signal to be signaled. As always, the
benefit of doubt is to be given to the existing primary trend, and hence, the
primary trend remained bullish during these weeks of non-confirmations. The
price action of FXI and HAO reminds me the words of Market Wizard trader
Minervini, who wrote in his book "Trade Like a Stock Market Wizard"
that quite often explosive moves are preceded by a shake out. Lower unconfirmed
lows fit quite well within the definition of a "shake out".”
Both SLV and GLD underwent a significant pullback after making their secondary
reaction highs. Such a pullback set them up for a primary bull market.
SLV
has broken up its secondary reaction lows (displayed as a red horizontal line).
GLD, though, has failed to confirm, and hence we cannot declare a primary bull market.
So
now, we have to wait. Either GLD deigns to confirm and a primary bull market
will be signaled in gold and silver, or the primary bear market lows are jointly violated in which case the
primary bear market will be reconfirmed.
Here
you have an updated chart. The blue rectangle displays the secondary reaction
against the primary bear market and the red lines show the relevant levels to
be broken up for a primary bull market to be signaled.
 |
| SLV and GLD in a secondary reaction and set up for primary bull market |
GOLD
AND SILVER MINER'S ETFs
Today
the primary trend turned bullish.
Take
a look at the chart below.
 |
| Primary bull market for SIL and GDX signaled today |
GDX
and SIL made its primary bear market lows on 8/26/2015. From that point GDX and
SIL it rallied for 2 day until 08/28/2015, which of course, is not a secondary
reaction (as two days do not fulfill the “time” requirement). Hence, on
8/28/2015 we didn’t have a secondary reaction. From that point GDX and SIL
started to decline. SIL made a lower low unconfirmed
on 9/10/2015. From that date it started to rally until 9/18/2015. On that date,
both GDX and SIL made higher highs. Furthermore, if we measure the time elapsed
from each respective primary bear market low, we see that SIL rallied for 6
days (or 16 days, if we consider as the only valid low to consider the last confirmed one, which is debatable, as
explained in a similar difficult technical juncture here). GDX rallied for 16 days. Even if we take just 6 days for SIL
(instead of 16), the average advance for both ETFs was (6+16)/2 = 11 trading days,
which fulfills the “time” requirement for a secondary reaction.
As
to the extent requirement, the
spreadsheet below says it all.
SIL
|
GDX
|
||||
HIGH
|
09/18/2015
|
6.91
|
09/16/2015
|
14.48
|
|
LOW
|
09/10/2015
|
6.23
|
8/26/2015
|
13.04
|
|
% change
|
0.10914928
|
0.11042945
|
|||
Min adjusted volt move
|
6.19
|
6.15
|
|||
SIL
rallied 10.91% and GDX rallied 11.04%., which amply exceeded the
volatility-adjusted minimum move (based on 30 days exponential average of daily
percentage change close-to-close).
All
in all, both the time and extent requirement for a secondary reaction had been
met for SIL and GDX
Subsequently,
both ETFs underwent a pullback (which was volatility-adjusted meaningful) that
set them up for a primary bull market signal.
On
10/02/2015 GDX broke above its 9/18/2015 secondary reaction closing highs. SIL
has done so (and confirmed) today.
Hence,
a primary bull market has been signaled today.
As
with Chinese stocks, this signal is a rather “tradable” one, since our stops lay
at the last primary bear market lows which are located at “reasonable” levels.
By “reasonable” I mean that our Dow Theory trailing stop is a quite narrow one
(around 11%).
SUMMARY:
1) Chinese stocks: Primary trend turned bullish today.
2) GDX and SIL (gold and silver ETF miners): Primary
trend turned bullish today.
3) GLD and SLV (gold and silver): Secondary trend
bullish. Primary trend remains bearish.
4) US Stocks: Secondary trend bullish. Primary trend
remains bearish.
Sincerely,
The
Dow Theorist
Thanks for the update. I was waiting for one as always : )
ReplyDelete