Monday, July 6, 2020

Dow Theory Update for July 6th: Setup for primary bear market completed for SIL and GDX

Secondary trend for US stocks turned bearish on June 26th

These words are being penned before the close of July 6th so things might change by the close. So readers beware.

Please excuse the quality of the charts, as I’m on a short vacation on a paradise beach, so I’m working with my laptop instead of my monster desktop. After having been locked down for some months, the Dominican Republic is partially re-opening its tourist sector. Turquoise pristine waters and terrific sunsets are the ideal setting to re-energize and to sharpen one's wit when it comes to analyzing the markets. 


Schannep’s Dow Theory (more properly: The Dow Theory for the 21st Century)

At 06/30/2020, the primary trend was bullish since April 6th, 2020, as was explained here.

The April 6th, 2020 Buy signal (caused by a Bull market definition) was not an easy one to act upon, as it was given at ca. 19% (for the S&P 500) off the bear market bottom. Fear that the market was already overextended and fear of a significant loss should the market decline revisiting the 03/23/2020 bear market lows resulted in some investors expressing concern. An in-depth study about the viability of the Buy signal of April 6th, 2020 is available in our June 1st, 2020 Letter to Subscribers of Since many followers of this blog have become Subscribers, so read carefully the June 2020 Letter. For those still sitting on the sidelines, I encourage you to become Subscribers.

Off the 06/08/2020 primary bull market closing highs, the Dow Industrials and Transports declined for 14 trading days until 6/26/2020. The S&P500 declined for just 3 trading days until June 11th. The average decline for the three indices was 10.33 days, which satisfies the time requirement under the Dow Theory for the 21st Century.

As to the extent requirement the Industrials declined -9.3%, the Transports  -12.4% and the S&P 500 -7.9%. Thus the extent requirement was also amply met, as we just need a movement of three percent or more on a confirmed basis.

Therefore, the secondary trend was declared bearish (secondary reaction against the primary bullish trend) on 06/26/2020. 

“Rhea’s /classical" Dow Theory

The primary trend is bullish since 4/29/2020 as explained here.  This primary bull market signal was determined by just demanding 13 and 18 trading days for the appraisal of the secondary reaction that led to the primary bull market signal.
I recently wrote a “saga” (here, here and here) where I made clear that neither the 15 days time requirement nor the 1/3 extent requirement is carved in stone. While most secondary reactions will last more than 15 days and retrace 1/3 of the previous swing, one should remain flexible, even under the “Rhea/classical” Dow Theory.

For those strictly demanding more than 15 confirmed days of declining prices, the primary bull market would have been signaled on 5/26/2020. More details as to this alternative signal are to be found in our June 1st, 2020 Letter to Subscribers.

Here you have an updated chart:

As of this writing, I see no secondary (bearish) reaction against the primary bull market. Off the 06/08/2020 primary bull market highs both indices have declined for 14 trading days. In this specific instance, and given that the decline has not reached extreme proportions (please mind that the Industrials are far from having retraced at least 1/3 of the bull swing that got started off the 03/23/2020 bear market lows), I am inclined to remain conservative and wait until I either see some more days of decline and/or a confirmed retracement of at least 1/3 in both indexes.

All in all, according to the classical Dow Theory, the primary and secondary trend is bullish.


The primary was signaled as bullish on 02/19/2020, as explained here.

Following a sharp decline, SLV penetrated its last recorded primary bear market lows on 3/12/2020. GLD declined but on a much more muted basis and did not confirm. Hence, no primary bear market signal. Rhea (page 77 of his book, Fraser Edition 1993) recognized as a valid exit point the confirmed penetration of the closing lows of the last primary bear market (red horizontal lines on the charts below).

One could consider the decline as a secondary reaction. An in-depth explanation about it here.

On 4/9/2020 GLD bettered its last recorded primary bull market highs unconfirmed by SLV, so the primary bull market has not yet been reconfirmed. Thus, the secondary trend remains bearish. 

Repeated lack of confirmation by SLV is beginning to annoy me. Too many days without the long awaited breakup. 

Here you have an updated chart:


A)   Market situation if one is to appraise secondary reactions not bound by the 3 weeks dogma.

One legitimate interpretation of the appraisal of secondary reaction under the Dow Theory let us conclude that the primary trend turned bullish on April 9th, 2020 as explained here.

In this post, I explained that the secondary trend could be interpreted as being bearish (secondary reaction against primary bull market).

I feel this specific appraisal of the secondary reaction is particularly pertinent if one considers that the primary trend turned bullish on April 9th, 2020, as unrealized profits are building up.

Off the 06/18/2020 closing lows, both ETFs have rallied for 8 trading days (and more than the minimum volatility adjusted movement). Hence, the setup for a primary bear market has been completed.

From here, we have two alternative outcomes:

a)     Either the last primary bull market highs (06/01/2020 for SIL and 05/19/2020 for GDX) are jointly broken up, in which case the primary bull market will be reconfirmed.

b)     Or both ETFs jointly violated their 06/18/2020 closing lows, in which case a primary bear market would be signalled.

So now, we have to wait and see.

B)    Market situation if one sticks to the traditional interpretation demanding more than three weeks of movement in order to declare a secondary reaction.

For those wishing to adhere to a more strict interpretation when determining secondary reactions, the primary trend would have remained bearish (bearish signal given on March 11th, 2020, as explained here) until 05/15/2020. On 05/15/2020 SIL finally broke up its last recorded primary bull market closing highs of 12/26/2019 and a primary bull market was signaled. GDX had done so on 4/22/2020. Thus, even under the most restrictive interpretation of the Dow Theory, the primary trend was signaled as bullish on 05/15/2020.

And what about the secondary trend if we were playing “conservative”? On 06/01/2020, SIL made its last recorded primary bull market highs. GDX had done so on 05/19/2020. Both ETFs made their last recorded closing lows on 06/18/2020. Thus, SIL declined for 13 trading days and GDX for 21 days. Given that SIL did not drop more than 15 days, under a “mainstream” reading of the classical Dow Theory, we cannot declare a secondary reaction yet.

 Here you have a chart depicting the most recent price action.


Depending on the way one appraises the secondary reaction that led to the setup that resulted in the primary bull market signal, the primary bull market was signaled either on 11/19/2018 or 12/18/2018. From Rhea's deeds and writings, we can see that the definition of secondary reaction is not carved in stone. The signal of 11/19/2018 was obtained by being satisfied with just 14 trading days for TLT and 15 days for IEF. The signal of 12/18/2018 was obtained by being strict and demanding on a confirmed basis at least 15 trading days on both ETFs. It’s up to each investor to decide what to do (i.e. to commit to each signal 50% of one’s equity or go fully invested with just one signal). 

From the 03/09/2020 closing highs, both ETFs declined until a bottom was made on 3/18/2020. Hence, there has been just 7 days of decline, and, thus, the time requirement for a secondary reaction against the strong bullish trend has not been met. However, given the magnitude of the shake-up, retracement of the last bull market swing, and the total percentage of the declines, I’d be inclined to shorten the time requirement so that the 03/18/2020 closing lows become the lows of a secondary reaction of just 7 trading days. One sensible trader might proceed as follows: Consider the 7 days decline as a secondary reaction, and, hence, as the basis for determining the setup for a primary bear market signal. At the same time, be more conservative and insist on demanding at the very least 10 days or even 3 weeks. Once we have two alternative setups, which may lead to actual sell signals, split the capital into two. 

All in all: both the primary trend remains bullish, and the secondary trend continues bullish if we stick with a 3 weeks’ time requirement for a secondary reaction.  However, if we consider the last pullback as a secondary reaction, the secondary trend would be bearish. Up to you to decide! Both alternatives set the basis for good trading and are not mutually exclusive.

On 04/01/2020 IEF bettered its last primary bull market closing highs of 03/09/2020 unconfirmed by TLT. On 4/21/2020 TLT equaled its last recorded primary bull market high of 03/09/2020 but could not better it. One tenet of the Dow Theory is that we need penetration, just one decimal or cent suffices. Hence, absent by a hair confirmation by TLT, the primary bull market has not been reconfirmed and, if we consider the last pullback as a secondary reaction, the secondary reaction has not been canceled. 

Here you have an updated chart. The grey rectangles display the “dubious” secondary reaction of just 7 days but associated with big declines both in terms of retracement of the preceding bull market swing  (ca. 75% for TLT retraced and ca. 50% for IEF) and the total percentage of the pullback (huge volatility, so a big movement percentage-wise). In my opinion, the charts are screaming at us “please shorten the time requirement for a secondary reaction; at least for half of your capital. Don’t ignore Rhea’s flexibility”. 

Here you have an updated chart:

One Dow Theorist

Saturday, June 27, 2020

Dow Theory Special Issue: On the Dow to Gold ratio

Is it a good timing device?

Since this blog deals with US Stocks and Gold, and prompted by a Subscriber of, today I’ll briefly discuss the Dow to Gold ratio and its usefulness as a timing device.

You can find an explanation of the Dow to Gold ratio and an excellent interactive chart displaying the ratio on any given date here. I quote from “”

“The Dow to Gold ratio indicates the number of ounces of gold it takes to buy the shares in the Dow Jones Industrial Average index”

This is the question posed by our Subscriber:


You’ve always helped me with my investing and are a sharp guy. I need your opinion on something if you don’t mind. I was reading that a simple market timing system that has proven very accurate over the last 100 years is the dow/gold ratio. When the ratio is above 15 it’s time to buy gold(now @ 14.8) and when it’s below 5 it’s a good time to buy the stock market. There would have been only a handful of trades in the last 100 years. In 1999 the ratio was 41 and gold took off in the 2000’s. Do you know anything abt this? Is it worth exploring? Pls advise. Thx Jack and I hope you and your family are during the covid lockdown.

This is the answer we gave to our Subscriber. While not a treatise on the Dow to Gold ratio, I feel it may be helpful to the readers of this blog:

My two cents on the Dow/Gold ratio (DGR, hereinafter).

Any trading system based on past parameters looks great. However, when looking forward such parameters tend to fail miserably. So there is no guarantee that buying gold at a DGR of 15 and selling it (and buying stocks) at 5 will work in the future.

I was an avid student on the DGR. Eventually, I dropped it as a timing device and opted for the Dow Theory. If gold is going to go up, the Dow Theory will let me know and the same applies to stocks.

The “ride” from 15 to 5 may be a bumpy one with horrible drawdowns in between. Is one willing to stick to the trade through thick and thin?

Furthermore, the ratio does not contain a “stop-loss”. What if both stocks and gold decline (i.e. due to deflation)? Are you going to hold gold until you reach 5? What if a GDR never reaches 5 or takes 30 years to do it?

In 2007, in real-time, I remember one article that advised buying gold based on a GDR around 16-17 based on the premise that until 2007 “stocks had an 18 year bull market”. The article went on to say: “Unfortunately for the stock market bulls, asset classes go in and out of favor, and the next great asset class may very well be gold. Well, even taking into account the 2008-2009 bear market (which would have been mitigated by the Dow Theory), stocks have continued to go up for the last decade. By the way, the 2008-2009 bear market also affected gold which endured a drawdown of ca. 30%. So the good ratio for gold prevailing in 2007 did not prevent gold from declining. Furthermore, when gold reached its top in 2011 the ratio stood at ca. 6.8, which, according to the system you suggest, would not have been a “sell” signal. In other words, you would have to endure a huge drawdown by not selling in 2011.

The ratio may be useful in order to superficially gauge whether gold is cheap or dear relative to stocks. And I write “superficially” because I have my qualms as to the rationale of the ratio. It’d be too long to explain why I feel the ratio is not carved in stone. Here suffices to say that the more prosperous a society becomes (more capital invested per head) the higher the discount (PER) for stocks, which implies higher values for GDR and more difficult to reach lower values.

Having said this, if I saw an extreme value such as 3, and the trend of gold was bullish under the Dow Theory or even a long term moving average, then I might make a speculative commitment. However, aided by the Dow Theory, I’d have my stops in place.

My final thought on gold is as follows: There is gold for speculation and gold as a long term, insurance-like, holding. I –contributing editor- own some physical gold. Such a gold is not subject to trading. It sits idle as an insurance against many unknowns (demise of the US dollar? Reset? Debt repudiation?). The gold for speculating is not physical. It is the kind of GLD. The gold for insurance is the one that sits quietly on a vault in a safe jurisdiction. Two different beasts.

That’s all for today.

One Dow Theorist