Dow Theory Update for June 22: Possible secondary reaction in SIL and GDX

Primary trends unchanged

In this post, I will focus on SIL and GDX where I seem to discern a change of the secondary trend.

As to the rest of the markets I monitor I see no changes and hence what I reported in my post of June 3^rd, 2020 remains unchanged.

GOLD AND SILVER MINERS ETFs

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

For those wishing to adhere to a more strict interpretation of a secondary reaction, 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. 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.

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

The blue rectangles on the right side of the charts might be construed as being a secondary reaction

As you can see, SIL made a higher closing high on 6/1/2020 unconfirmed by GDX. Lack of confirmation persisted until today. This persistent lack of confirmation might be suggestive of the development of a secondary reaction.

SIL has been declining for 13 trading days and GDX for 21 days. Recently, 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.

The table below summarizes the current juncture for SIL and GDX:

So we can conclude:

1.      The retracement of the bull market swing has not reached 1/3.

2.      However, percentage-wise the decline has been noteworthy as SIL has declined -12.15% and GDX -12.85%. Please note that the minimum movement (volatility-adjusted) for SIL and GDX stands at ca. 5% and hence the pullback has greatly exceeded the threshold for a significant movement. More about volatility-adjusted movements when being outside the realm of US stocks indexes here. 

3.      While not shown on the charts, gold has been stronger than silver. So there seems to be a divergence between the metals and their miners, as SIL has been stronger than GDX. This is not constructive. 

4.      However, the pattern of volume speaks against a secondary reaction. The last low of 6/18/2020 was on very low volume whereas the two up days that followed (until today) were on stronger volume. However, volume is less dependable than price action.

So what’s my takeaway?

I insist that there is not one single “right” reading of the market. Furthermore, the appraisal of a secondary reaction may be influenced by one’s own way of trading (i.e. tolerating larger or tighter stop losses, portfolio considerations, etc.). In my specific case, and given that:

a)      I declared a primary bull market on the early date of 4/9/2020 with an advantageous entry price, and

b)     a position of 50% in SIL and 50% in GDX taken on 4/9/2020 is showing nice unrealized profits, and

c)     an exit at the lows of 6/18/2020 would result in a clearly winning trade (around 16.2% win for SIL and ca.10.73% for GDX ) in less than three months

I’d be inclined to accept the current pullback with its last 6/18/2020 lows as a secondary reaction. However, I insist, it would be fully legitimate to, i.e., wait until at SIL declines for more than 15 days, or a full 1/3 retracements is attained.

Furthermore, if I were managing a portfolio, in this specific instance, I’d proceed as follows: I’d consider the current 6/18/2020 as valid secondary reaction lows (which may become our exit point if broken down) for half of the equity committed to SIL and GDX. However, I’d probably wait for some more retracement and/or days of decline for SIL in order to declare the existence of a secondary reaction. By doing this I’d split my risk across two sensible ways of trading.

Sincerely,

One Dow Theorist