Dow Theory Update for May 15: SLV and GLD under secondary reaction against primary bull market

Trend for stocks unchanged

I am writing early in the morning before the open of May 15^th. So things might change by the today’s close.

US STOCKS

The primary trend is bullish since November 21^st, 2016, as explained here and here.

The secondary trend is bearish (secondary reaction against the primary bull market). The secondary reaction was signaled on April 13^th, as explained here.

As per Schannep’s Dow Theory in order to complete a primary bear market setup, at least one index should rally more than 3% off the secondary reaction closing lows. The Transports and the S&P 500 have done so. The Transports secondary reaction closing lows were made on April 13^th, 2017 (closing price 8874.56). On April 24^th the Transports closed at 9282.99, which is a rally of +4.60%, thus exceeding the minimum 3% requirement.

The S&P 500 secondary reaction closing lows were made on April 13^th, 2017 (closing price 2328.95). On May 10^th, the S&P 500 closed at 2399.63, breaking out above its last recorded primary bull market closing high of March 1^st, which amounts to a rally of 3.03% (which is more than 3%).

By the way, the S&P 500 higher closing high has not been confirmed by neither the Industrials nor the Transports. Thus, we cannot declare the secondary reaction as extinguished. Furthermore, the longer the lack of confirmation by the Transports and Industrials persists, the more suspect the current rally off the April 13^th, 2017 closing lows becomes.

The SPY has not deigned to better its March 1^st closing high. As of this writing (10:25 a.m. NY time) the SPY is breaking out above such a high. However, we have to wait for today’s close.

So now we have two alternative scenarios:

a) Either the three indices break above the March 1^st, 2017 closing highs (last recorded primary bull market highs), and the primary bull market gets reconfirmed. Only the S&P 500 has hitherto done so.

b) Or, the S&P 500 together with other index (either the Transports or the Industrials) break down the secondary reaction lows (made on April 13^th for the SP 500 and Transports, and on April 19^th for the Industrials), in which case a primary bear market would be signaled. Why the S&P500 must always be present for a primary bear market signal to be signaled? The in-depth answer here.

As I explained in-depth here, even if the current primary bear market setup becomes an actual primary bear market signal, the current trade is very likely to be a winner. 

Furthermore, as I explained here , if the current "fibrilation" state were to persist (something we cannot know in real time), we might have seen end of the current bull swing.

Here you have an updated chart:

The only thing that is certain is that the primary bull market, until reversed, deserves the benefit of doubt

GOLD AND SILVER

The primary trend turned bullish on April 12^th, 2017 as explained here

The secondary trend is bearish, as both SLV and GLD have declined for more than 15 trading days (when using just two indices, I’d rather demand a longer time period for a secondary reaction to exist, although the appraisal of secondary reaction is a tricky business).

Both SLV and GLD have retraced more than 1/3 of the previous primary bull market leg (see chart below). Such a primary bull market swing starts at the closing lows of the last primary bear market which were made on 12/23/2016 for SLV and 12/15/2016 for GLD and finished at the closing highs of 4/13/2017 (SLV) and 4/18/2017 (GLD).

Thus, both the time and extent requirement for a secondary reaction have been met, and we can declare the existence of a secondary (bearish) reaction against the primary bull market.

Since the May 9^th, 2017 closing lows both SLV and GLD have been rallying for three days (likely four if today’s close is also up). On a closing basis neither SLV nor GLD have rallied enough to set up both precious metals for a primary bear market signal (not even one precious metals has rallied on a closing basis more than 3%, or more, if we perform volatility adjustments). More about volatility adjustments here

 

SLV and GLD under a secondary reaction

As an aside, it is worth mentioning that the primary trend when using weekly bars is bearish, which tends to be headwind for any meaningful bullish action. Furthermore, the gold and silver miners ETFs remain in a primary bear market, which is also a negative.

GOLD AND SILVER MINERS EFTs

The primary trend is bearish, as was explained here and here.

The secondary trend is bullish as explained here

As was explained here, SIL and GDX have set up for a primary bull market signal. Here you have an updated chart. The blue rectangles display the bullish secondary reaction against the ongoing primary bear market whereas the orange rectangles display the pullback that setup both ETFs for a primary bull market signal.

Will the blue horizontal lines be broken up (bull signal)? Or the red ones be violated (bear market reconfirmed)?

   

If the last recorded primary bear market lows were jointly revisited (red horizontal lines) , the primary bear market would be reconfirmed.

If the secondary reaction closing highs (blue horizontal lines) were jointly broken up, a primary bull market would be signaled.

It is worth mentioning that SIL made on May 4^th, 2017 a marginally lower closing low whereas GDX refused to do so. Since that date precious metals (stocks and the metals themselves) have been rallying.

As an aside, it is worth mentioning that the primary trend when using weekly bars is bearish, which tends to be headwind for any meaningful bullish action.

Sincerely,

The Dow Theorist