Wednesday, July 27, 2016

Dow Theory review for 2015: GOLD AND SILVER




First of all my apologies for posting this review so late. However, facts are facts. My belated analysis of gold and silver performance does not change what happened in 2015.

Truth be said: This blog takes quite a toll on my free time. If time were in unlimited supply I’d like to post more studies (yes, there are many things I’d like to write about) and cover more markets under the prism of the Dow Theory but to do this I’d need to dispense with all other occupations (something I cannot do). Well, the rant is over, and let’s get started

GOLD AND SILVER

GLD:

2015 began with an ongoing bear market which had been which has been signaled by this blogger truly yours on December 20th, 2012 (as explained here).

On October 12th, 2015 a very dubious primary bull market signal was signaled. In real time, I wrote that it was perfectly legitimate to ignore the signal, as the secondary reaction whose closing highs had been just broken up was more than dubious (time requirement very dubiously met).


By the way, my warnings concerning the dubious nature of the primary bull market signal were quite clear, since I minced no words:

“On a closer look, I have seen that SLV did not even manage to rally for at least 10 calendar days. According to Schannep, at least two indices should rally for 10 calendar days, irrespective of the average time of trading days. While all this is not carved in stone, and Rhea himself stressed the difficulty in defining secondary reactions, I feel that maybe the latest closing highs we have seen may not be indicative of a primary bull market, but rather constitute the real secondary reaction highs. Those willing to jump the gun, may consider the primary trend as bullish (especially given that the ETFs miners, which tend to lead, are already on a primary bull market of their own). Nonetheless, those more conservative may rightfully consider that the last recorded highs determine the real secondary reaction, and from this point we should wait for a pullback of at least 3% (in volatility-adjusted terms) on either SLV or GLD. After such a pullback the joint violation of the October 12 closing highs would entail a primary bull market.
 (bold letters added)

 On November 17th, 2015, the last recorded primary bear market lows were violated, which implied a reconfirmation of the primary bear market (for those who interpreted that a “bull” had never existed) or a new primary bear market signal had been signaled (for those that considered that a primary bull market had been signaled). More about it here


All in all, 2015 ended under the grips of the bear.

The year began with GLD at 114.69 and closed at 101.46. Hence, a decline of -11.53%.

Those who decided to stay the whole year on the sidelines avoided thus a loss of -11.53%

On the other hand, those that, in spite of my warnings concerning the dubious nature of the signal, went long on October 12th, 2015, underwent a loss of -8.05% (entry at 111.31 and exit at 102.34).


Please mind that even for those that went long and lost -8.05% on the trade that those with a buy and hold strategy would have lost -11.53%. So even accounting for the whipsaw, the Dow Theory managed to outperform buy and hold in 2015 (as it did in 2013 and 2014).

Furthermore, we have to bear in mind that during 2013 and 2014 we were also on the sidelines, hence avoiding a whopping -28.83% loss for that year, and an additional loss of -3.746% during 2014.


Thus, I am quite dumbfounded at some recent criticism recently thrown which literally says that the:

“[f]requency of inaccurate calls for gold, silver, HAO, GLD and SLV suggests that the Dow Theory being applied is inaccurate”
 
I feel that being on the sidelines since the end of 2012 all through the beginning of 2016 proves several things:

            a) When there is a real trend (in this case bearish) there is not so much  frequency” of  calls.

            b) Besides such calls (only one, at most two) have been very accurate.

That being said, it is true that anything can happen on any given Dow Theory signal. One has to keep a long term perspective. To expect positive results on any given trade or in any given year is a very false assumption, as I explained here.

Here you have the 2015 chart for GLD:

Another year of bear market action: 2015


 SLV:

As to silver (here SLV), which I trade in tandem with paper gold (GLD), we had the same Dow Theory signals (of course). For those seeing a secondary reaction against the primary bear market and acting upon the breakup of the secondary reaction closing highs, there was a whipsaw, as the primary bull market was quickly reversed when the last recorded primary bear market closing highs were jointly broken by SLV and GLD. For more details, please read my comments concerning GLD above.

The year began with SLV at 14.96 and closed at 13.19. Hence, a decline of -11.83%.

Those who decided to stay the whole year on the sidelines avoided thus a loss of –11.83 %

On the other hand, those that, in spite of my warnings concerning the dubious nature of the signal, went long on October 12th, 2015, underwent a loss of -10.44% (entry at 15.13 and exit at 13.55 on Nov 17, 2015).

Please mind that even for those that went long and lost –10.44 % on the trade that those with a buy and hold strategy would have lost –11.83 %. So even accounting for the whipsaw, the Dow Theory managed to outperform buy and hold in 2015 (as it did in 2013 and 2014).

Furthermore, we have to bear in mind that during 2013 and 2014 we were also on the sidelines, hence avoiding a whopping -37.47% loss for that year, and an additional loss of -21.68% % during 2014.

Thus, you can see that the Dow Theory (even allowing for a very dubious whipsaw) did a good job at riding (by being out of the market) the bearish trend that was signaled at the end of 2012.

Here you have SLV’s chart for 2015:

 
More bearish action in 2015
I hope to post soon my 2015 review for SIL and GDX (gold and silver miners ETFs). Hopefully, it won’t take too long, or, at least, it will take less time than my gold and silver review for 2015.

Sincerely,
The Dow Theorist

Thursday, July 21, 2016

Dow Theory Update for July 21: Two typical Dow Theory misconceptions (II)





And setting the record straight


I am writing before the open.

Misconception 2: Lack of confirmation suffices to change a trend


A recent article post on Zero Hedge with the bombastic title “The One Key Indicator Pointing To A Bear Market” makes two errors.


The first one is to assume that the market is still under a primary bull market. It seems that the author is out of gear with the primary trend, as the market turned bearish already on June 24th, as it was explained here.

Furthermore, the primary trend was signaled by both the “classic” Dow Theory (just two indices and stricter time requirement to declare a secondary reactions) and Schannep’s Dow Theory. Thus, there is no excuse for ascertaining the primary trend.

The second error, which is the second misconception I want to address, is to consider that the bull market (assuming for the sake of argument there is still one, which is not the case) may be about to change due to the current Transports lack of confirmation. Even if one’s interpretation of the Dow Theory may lead the practitioner to believe the primary trend remains bullish, I must say that higher highs (or lows) not confirmed do not suffice to change any trend.

Lack of confirmation merely implies that the trend which is not being confirmed becomes suspect. Thus, if we (wrongly) assume that the primary trend is bullish, lack of confirmation merely means that it may (“may” not “must”) lead to a secondary reaction. Of course, by luck, it can also lead eventually to a primary change of trend. However, in real time, nobody knows whether it will lead to a change of the primary trend; at best, lack of confirmation increases the odds for a secondary reaction. It is true that Rhea wrote that the principle of confirmation is more important at critical junctures (i.e. when a primary bull/bear market may be about to change). However, it takes more than a lack of confirmation of the primary thrust to change a primary trend from bullish to bearish and vice versa. We need a counter movement and the breaking out (now confirmed) of the relevant closing highs or lows. Which are the “relevant” closing highs or lows? There are only three relevant highs or lows, as it was explained in the previous post. Any other highs or lows which you may read or be applied elsewhere is humbug.  More about them here:


The takeaway under the current market juncture is as follows: The primary trend is bearish. Higher closing highs (breakout of the primary bull market highs of April 20) by the Industrials unconfirmed by the Transports, merely implies:

a) The Trend has not changed to bullish due to the lack of confirmation.

b) The secondary trend (the bullish secondary reaction against the primary bear market) may be running out of steam. The longer it takes for the Transports to confirm the more likely for the primary bearish trend to reaffirm itself, and hence more likely for us to see a new primary bear market swing..

The two misconceptions I have mentioned in these two posts lead many Dow Theorists astray. Half-truths badly digested are likely to be misleading.

US STOCKS

The primary trend turned bearish on June 24th, as was profusely explained here.

The secondary trend is bullish (secondary reaction against the primary trend), as all three indices (Industrials, Transports and SP 500) have been rallying for more than 8 trading days (average of the three indices) and each of them has rallied more than three percent. As of this writing we don’t know whether we can declare the end of the secondary reaction, as no index has pulled back more than 3%.

As I explained here, if the Transports were to break out above their April 20th closing highs (primary bull market highs), a primary bull market would be signaled. The longer it takes for the Transports to confirm the SP 500 and Industrials higher highs, the more likely a decline is in the making.

GOLD AND SILVER

The primary trend is bullish (Dow Theory signal of March 17th, 2016), as reported here and here.

The secondary trend is also bullish as explained here



Recent declines do not fulfill the time requirement for a secondary reaction yet (or never). Given that the time requirement for a secondary reaction has not been met, I don't bother with calculation the "extent" requirement, as I need both to declare the existence of a secondary reaction.


GOLD AND SILVER MINERS ETFs

The primary and secondary trend is bullish as explained here, and more recently here



Recent declines do not fulfill the time requirement for a secondary reaction yet (or never). Given that the time requirement for a secondary reaction has not been met, I don't bother with calculation the "extent" requirement, as I need both to declare the existence of a secondary reaction.

Sincerely,
The Dow Theorist