Dow Theory Update for November 2: Gold, silver and their miners ETFs under a secondary reaction

 The Dow Theory managed to "smell" the change of trend well before other indicators

US STOCKS

The primary and secondary trend are bullish as explained here and here

  

By the way, this primary bull market signal was not greeted with enthusiasm by many. It is said that bull markets climb a wall of worries, and this last signal was met with disdain. This is what prompted me to write this post in order to set the record straight about the odds and the necessity of honor all signals.

Today Joshua’s Brown “the reformed broker” blog has come to my aid by writing that October was a bear killer “as the month’s low happened on the first day and stocks spent the remaining 30 days screaming higher”. The interesting thing is that there seems to be a reason for the bereavement of the primary bear market, as US-equity ETFs brought in more cash in October than the rest of the year combined. What is even more interesting, I quote Josh, is that:

“at the halfway point of October, flows were still negative for a lot of categories. That’ll teach you to ignore weekly fund flow information or, at least, to discount its importance for the future performance of an asset class.”

Please read Josh’s post “A very Big Month”, it is worth 2 minutes of your time.

And here things get more interesting. The Dow Theory signaled the primary bull market on October 7, which means that the Dow Theory “sensed” the tide of the market turning even before the massive cash inflows started to gain momentum. The uncanny ability of the Dow Theory the get us early into a trade (while mostly avoiding whipsaws) is remarkable.

GOLD AND SILVER

The primary trend is bullish (albeit hesitatingly) as explained here.

The secondary trend is bearish (secondary reaction against the primary bull market).

SLV and GLD declined for more than 8 days on average (and more than 10 calendar days each). The time requirement for a secondary reaction has been thus met. As to the extent requirement, readers of this Dow Theory blog know that I adjust the minimum 3% requirement of the Dow Theory (which was thought for stocks) to the ratio of volatility between stocks (SPY) and the asset concerned (i.e. GLD, SLV). Thus, if GLD had an average 30-days volatility of 6% whereas the SPY in the same period had 2%, I would require a minimum movement for GLD of 9% (6:2 = 3; and 3 x 3 (min extent for stocks) = 9 ).

I performed, thus, the volatility adjustments for SLV and GLD (30-days average of daily price changes). Given the current levels of 30-days volatility, SLV should move at least 4.10% for any movement to be meaningful. GDL should move at least -2.58%.

Well, SLV declined by -4.92% and GLD declined by -4.5%. Furthermore, if I were to examine the secondary reaction under the lens of the classical/Rhea Dow Theory, the decline has retraced (confirmed) more of 1/3 of the primary bull market swing.

Hence, the extent requirement has also been met.

All in all, SLV and GLD are under a secondary reaction against the primary bull market.

Now we have to wait for at least a 2 days rally which, at least on one precious metal, exceeds the minimum volatility threshold. If this happened, then the setup for a primary bear market signal would have been completed.

If, on the other hand, both gold and silver broke up above the last recorded closing highs (primary bull market highs), then the primary bull market would be reconfirmed.

If I apply the Dow Theory to weekly bar charts, I see that the higher time frame trend is unambiguously bearish. So the primary bull market signal on the lower time frame (daily bars) is to overcome headwind. So let’s see what happens.

Here you have an updated chart:

 

Secondary reaction against primary bull market for SLV and GLD

GOLD AND SILVER MINERS ETFs.

The primary trend is bullish, as explained here.

Both ETFs have been declining for more than 8 days on average (and more than 10 calendar days each). The time requirement for a secondary reaction has been thus met.

As to the extent requirement, both SIL and GDX have declined more than the minimum (volatility-adjusted) movement. The 30-days average ratio of each ETF versus the SPY volatility amounts to 10.15% for SIL and 10.50% for GDX. SIL has declined -10.15% and GDX have declined -11.77%. Thus, both indices have exceeded the minimum volatility threshold.

All in all, both precious miners ETFs are under a secondary reaction against the primary bull market. I’d like to note that the trend, when applying the Dow Theory to weekly bars, is bearish, and hence, as I said with gold, there seems to be headwind.

Now we have to wait for at least a 2 days rally which, at least on one ETF, exceeds the minimum volatility threshold. If this happened, then the setup for a primary bear market signal would have been completed.

If, on the other hand, both gold and silver miners ETFs broke up above the last recorded closing highs (primary bull market highs), then the primary bull market would be reconfirmed.

Here you have an updated chart:

 

Secondary reaction for SIL and GDX against primary bull market

Sincerely,

The Dow Theorist