Monday, November 23, 2020

Dow Theory Update for November 23th: Primary bear market for SIL and GDX signaled on 11/23/2020

 

Gold and Silver (GLD and SLV) remain in a primary bull market


As a reminder of why I use two alternative definitions of a secondary reaction, please read here. 


GOLD AND SILVER MINERS ETFs

 

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 reactions under the Dow Theory let us conclude that the primary trend turned bullish on April 9th, 2020, as explained here.

On August 5th, 2020, both SIL and GDX made their last recorded highs. From that day, prices dropped for 34 trading days until the final bottom made on September 23rd, 2020. So the time requirement for a secondary reaction had been met. Both in terms of volatility and retracement the pullback met the extent requirement as well. An in-depth explanation of the appraisal of the secondary reaction is to be found here.

 

Following the September 23rd closing lows, there was a rally until 11/6/2020 (SIL) and 10/14/2020 (GDX). The magnitude of the rally (both in terms of time and extent) unambiguously qualified as a proper rally to setup SIL and GDX for a primary bear market signal. Here you have a table displaying the specific values:

 


Here you have the charts displaying the current situation. The orange rectangles show the secondary reaction that got started against the then existing primary bull market. The blue rectangles display the rally that followed the lows of the secondary reaction. The red horizontal lines highlight the price level of the 9/23 secondary reaction lows (the relevant levels to be broken down). On 10/28/2020 GDX broke down below its secondary reaction lows unconfirmed by SIL, and, thus, no primary bear market was signaled. Today, November 23rd, SIL broke down its 9/23/2020 lows, confirmed, and accordingly a primary bear market has been signaled.

 


 

All in all, while I continue to see lots of bullishness around precious metals in the media, what I see on the charts is a primary bear signal, which means that more likely than not that lower prices may be in store for us. Furthermore, the issue of bullishness and bearishness is relative. It depends on one’s time-frame. If we were secular investors with a high drawdown tolerance (which I have not), then we might be entitled to a bullish assessment. If we were day traders, today’s action would be most bearish. In our Dow Theory micro world, we know that our trades tend to last on average 1 year, and within this time-frame, I know that it is more likely than not to see lower prices for the next few months. Please also mind that both in US stock indexes and precious metals, a primary bear signal does not entail in all cases a colossal crash. No. In a few instances, our bear signals will help us avoid a crash (i.e. a further decline following the Sell signal of -25% or more). However, on many other occasions, the fall that follows is of more modest proportions. The key point is to know that we fare better by honoring all primary bear market signals (less drawdown and, normally, some out-performance) than by being buy and holders.

 

Of course, it could be a failed signal (meaning that we’d be obliged to re-buy at a higher price level) if the decline following this Sell signal has little follow-through. However, as Rhea was fond of saying, in the not so probable event of having to buy at a higher level, this would be the insurance premium we pay to protect ourselves against a huge drop in the markets. Please mind that, as far as I am aware of, no significant decline has been recorded before the onset of a primary bear market (in stocks this is well documented, and with precious metals this has been my experience since I’ve been blogging).

 

This trade has lasted 7 months and a few days. As you can see in the table below, a 50/50% position taken on each of the two ETFs yielded 31.85%. 

 


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

 

As I explained in my post of October 8th, 2020, no secondary reaction had been discerned when one sticks to the “mainstream” interpretation of the Dow Theory, which requires more than three weeks of declining prices and a confirmed retracement of 1/3 of the previous bull market swing.

 

Therefore, since we didn’t have a secondary reaction, no primary bear market has been signaled today.

 

However, today’s decline has finally resulted in a confirmed retracement exceeding 1/3 of the previous primary bull market swing. The bull market swing started on 3/13/2020 (primary bear market lows) until 8/5/2020 (last recorded primary bull market highs). Percentage-wise, both ETFs have declined more than 20% off their 8/5/2020 bull market highs, which amply satisfies the minimum volatility-adjusted movement. Hence, unambiguously, the extent requirement for a secondary reaction has been fulfilled.

 

As to the time requirement, I could count 77 trading days of declining prices, which amply meets the time requirement for a secondary reaction.

 

Give that both the time and extent requirement have been fulfilled, we can declare the existence of a secondary reaction. From now on, we look for the end of this pullback and the start of a rally that sets up both ETFs for a primary bear market signal. So, let’s keep our eyes glued to the charts in the coming days.

 

The table below highlights the key price levels and retracement calculations:

 


 

 The charts below display the start of the bull market swing at the 3/13/2020 bear market lows (botttom) until its confirmed closing high of 08/05/2020 (highlighted by the curved blue lines) and the subsequent secondary reaction (orange rectangles).


 Sincerely,

One Dow Theorist

Friday, November 6, 2020

Dow Theory Update for November 6th: Primary bull market in US stocks still in force

Trends unchanged for precious metals, miners and US interest rates

 

Today let’s take a look at the US stock market. It was overdue. 

 

Primary and secondary trends remain unchanged for gold and silver, their ETF stock miners and US interest rates. You can read the latest report concerning these markets here, here and here.

 

US STOCKS

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

 

 

On 11/02/2020, 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 and why it was served on a silver platter, is available in our June 1st, and November 1st 2020 Letters to Subscribers of thedowtheory.com. Since many followers of this blog have become Subscribers, please read both Letters carefully. For those still sitting on the sidelines, I encourage you to become Subscribers, as you are missing a great piece of the action and ongoing research and Jack Schannep’s own market wisdom. Many things are going on in our monthly Letter and, importantly, Subscribers are alerted in real-time of any impending Buy or Sell signal.

 

The secondary trend was declared bearish on 06/26/2020, as was explained here. On 7/20/2020, the S&P 500 bettered its 6/8/2020 primary bull market highs unconfirmed. On 8/4/2020 and 8/10/2020, the Transports and the Industrials confirmed, so the secondary reaction was canceled, and the primary bull market reconfirmed. So the first secondary reaction was successfully overcome.

 

The S&P 500 and the Industrials made their last recorded highs on September 2nd. The Transports did so on September 16th. From such highs, all indices declined until September 23rd. Since the decline amply exceeded 3% on a confirmed basis, so the extent requirement for a secondary reaction was met. The pullback for the three indices averaged 11 trading days, which satisfied the time requirement. So the secondary trend turned bearish (secondary reaction against the primary bull market).

 

On September 28th, having the S&P, and the Dow Industrials and Transports rallied 3% or more off their September 23rd closing lows, which set up US stock indices for a primary bear market. Please mind, that a “setup” is not the actual signal. Thus, until the S&P 500 plus one other index jointly violates their 09/23/2020 secondary reaction lows no Sell signal will be given.

 

The Transports broke topside on 10/07/2020, its last recorded primary bull market highs (9/16/2020) unconfirmed. So the secondary reaction has not been successfully resolved.

 

On the other hand, both the Dow Industrials and Transports broke down below their 09/23/2020 secondary reaction closing lows without the confirmation of the S&P 500. Therefore, no primary bear market was signaled. As a reminder, it is one of the tenets of Schannep’s Dow Theory that the S&P 500 must always be present for a signal to be given.

 

So on 10/30/2020, we were in no man’s land. A breakup unconfirmed (so the secondary reaction remains in force) and a breakdown unconfirmed (so no primary bear market signal).

 

All in all, the primary trend, in spite of unconfirmed breakups and downs, remains bullish. The secondary trend remains bearish (secondary reaction).

 

Conclusion:

Now everything depends on the S&P 500. If it hurdles its 09/02/2020 closing highs, the secondary reaction would be terminated and the primary bull market reconfirmed. Conversely, if it broke down below its 09/23/2020 secondary reaction lows, a primary bear market would be signaled.

 

Here you have an updated chart displaying the price activity until November 2nd, 2020. The red line displays the price level of the secondary reaction closing lows. The blue horizontal line (middle chart for the Transports) displays the price level of the last recorded primary bull market highs which has been hurdled by the Transports unconfirmed.

 

The S&P 500 (bottom chart) refused to break down below its secondary reaction lows

  

“Rhea’s /classical" Dow Theory

 

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

 

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 to appraise the secondary reaction that led to the primary bull market signal.

 

Some months ago I 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.

 

On 8/4/2020 and 8/10/2020, the Transports and the Industrials bettered their 6/8/2020 primary bull market highs and, thus, the primary bull market was confirmed. Please mind that no secondary reaction was canceled by the higher highs, as the decline did not reach the necessary time and (more importantly) extent proportions to qualify as a secondary reaction (more details in this post)

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. Under a flexible interpretation of the Dow Theory, and given that since the last recorded confirmed highs 41 trading days have also elapsed for the Transports), I’d be inclined to say that the time requirement could have been met provided the extent of the decline makes up for the lack of time.  

 

Thus, I’m willing to be accommodative as far as the decline has been sizeable. In other words, the more “decline” the less stringent I am with the “time” element. However, the Dow Transports has not remotely retraced 1/3 of the previous bull swing (which started at the lows of 3/23/2020, as no secondary reaction has been signaled to date). The Industrials haven’t retraced 1/3 of the previous swing either. Thus, given that the extent requirement has not been met, I’d need more days of declining prices in order to consider the time requirement as fulfilled.

 

All in all, even under a “Rhea-like” interpretation of the Dow Theory, I feel that neither the time nor the extent requirement has been met, and hence we cannot talk of a secondary reaction.

 

Here you have an updated chart. The grey rectangles display declines that do not qualify as a secondary reaction.

 

Even if I were to be more flexible, I still would not discern a secondary reaction

  

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

 

Following the 6/8/2020 highs, both the Industrials and Transports declined for several days. However, neither index exceeded 15 trading days of decline, so the time requirement for a secondary reaction was not met. So no secondary reaction was signaled.

 

On 8/4/2020 and 8/10/2020, the Transports and the Industrials bettered their 6/8/2020 primary bull market highs and, thus, the primary bull market was confirmed.

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. So the time requirement has not been met (the Transports is far from 3 weeks). Absent the time requirement, I don’t even bother with the extent requirement.

 

So, under the most prevalent interpretation of the “classical” Dow Theory no secondary reaction against the primary bull market has been signaled.

 

Here you have an updated chart. Grey rectangles imply a pullback that does not qualify as a secondary reaction. 

 

Grey rectangles display the current pullback which does not qualify as a secondary reaction

 

The chart below displays the price action since the March 23rd bear market bottom to date. You can also see the primary bull market signal of May 26th (blue arrows).

 

 


Sincerely,

The Dow Theorist