Dow Theory Update for January 9: Gold and Silver under primary bull market since 12/24/2018

 I am writing before the close

Today I focus on gold and silver.

GOLD AND SILVER

As I explained yesterday, the primary trend turned bullish on 12/24/2018. 

As a recap: The primary trend was declared bearish on July 7^th, 2017, as explained here and here.

On July 17^th, 2018 SLV violated its primary bear market lows of July 7^th, 2018 unconfirmed by GLD. Finally gold capitulated and violated its primary bear market closing lows on August 1^st, 2018, thus confirming SLV. The confirmed violation of the primary bear market lows, reconfirmed the primary bear market. Please mind that this was not a signal to “sell”, as such a signal (the indication of the change of the trend from bullish to bearish) was already given on July 7^th, 2017. The confirmed violation of the last recorded primary bear market lows merely indicated a reconfirmation of the existing bearish trend.

Here you have the chart depicting the situation on August 31^st, 2018 (see post) when there was no primary bull market in sight.

Situation at 8/31/2018: A primary bear market that had been reconfirmed by lower lows

On 8/16/2018 GLD made a bottom on a closing basis. SLV did the same on 9/14/2018. On 10/26/2018 GLD made a closing high which was followed by a pullback which did not violate the 8/16/2018 closing lows. SLV made on 11/02/2018 a closing high which was followed by a huge pullback which violated the 09/14/2018 primary bear market closing lows. The lack of confirmation by GLD implied that the primary bear market was not reconfirmed and that the preceding rally (secondary reaction against the primary bear market) highlighted on the chart by the blue rectangles on the right side remained valid. Furthermore, both pullbacks (orange rectangles on the right side of the charts) setup SLV and GLD for a primary bull market signal. By the way, contrary to their nature, the volatility (measured as daily percentage price change averaged over 30 trading days) of both SLV and GLD has been lower than that of the S&P 500, which implies that the volatility adjusted minimum movement is less than 3% for both SLV and GLD. More about volatility adjusted movements here

Thus, the rally off the primary bear market lows satisfied the extent requirement for a secondary reaction to exist (+4.76% for SLV and +5.10% for GLD). Additionally, SLV rallied 35 trading days and GLD for 50 days. Hence, the secondary reaction amply met the time requirement (more than 2-3 weeks) on a confirmed basis. While nobody knows the future, I like the bottoming action that has taken place. We are not dealing with a dubious secondary reaction which barely lasted 3 weeks. The longer time for the secondary reaction to “ripen “and its “line-like” (volatility compression) characteristics seem to imply accumulation and that the subsequent primary bull market signal has some “steam” to run. I have no idea as to price objectives but the charts seem to suggest that some upward movement is more likely than not. The unconfirmed violation by SLV of the primary bear market lows might also give more strength (weak hands washed out) to the ongoing rally. Let’ see and observe the markets.

On 12/04/2018 GLD broke above its 10/26/2018 closing highs unconfirmed by SLV. On 12/24/2018 SLV did likewise, and hence a primary bull market was signaled.

The charts below display the action of the past few months leading to the current primary bull market signal.

 

Secondary reaction (blue rectangles) followed by pullback (orange) and subsequent breakup: Primary bull market

By the way, the primary bear market has lasted much longer than one year quite in line with what is to be expected from Dow Theory signals. It had two secondary reactions. The first one did not result in a primary bull market signal (which is normal) and the second one resulted in the current primary bull market signal.

As of this writing both SLV and GLD are flirting with bettering the current bull market swing closing highs, so there is no secondary reaction in sight.

Interesting piece of information: The subsequent decline following the primary bear market signal of 7/5/2017 until a bottom was made on 9/14/2018 was -10.18% for SLV. The subsequent decline following the primary bear market signal of 7/5/2017 until a bottom was made on 8/16/2018 was -3.62% for GLD. Given that the primary bull market signal was given for SLV at +4.76% off the primary bear market bottom, “timing” the market resulted in bettering buy and hold (plus interests earned when being out of the market and risk avoided). On the other hand, given that the primary bull market signal was given for GLD at +5.10% off the primary bear market bottom, “timing” the market would have resulted in a minor loss (further decline until bottom of -3.62% versus an entry at +5.10% from the bear market lows). If we take a longer term perspective, the Dow Theory has saved the skin of investors since 2012 and has beaten buy and hold handsomely (not by "winning" but by avoiding "losing", that is keeping the powder dry.

Next post will deal with gold and silver miners ETFs.

Sincerely,

The Dow Theorist