Dow Theory Update for July 13th, 2020: All primary and secondary trends in precious metals and their miners are now bullish

Trends for US stocks indices and US interest rates unchanged

In this post, I will focus on the precious metals sector. From now on, and if time allows when being outside the realm of Schannep’s Dow Theory (more appropriately “the Dow Theory for the 21^st Century”), I’ll try to show two alternative appraisals of secondary reactions. Rhea insisted ad nauseam that the classification of secondary reactions is not carved in stone. Furthermore, I’d add that depending on one’s time preference and trading style, it is advisable not to be bound to just one definition of secondary reaction. It is true, though, than on occasions, we will only be able to discern one secondary reaction from the price structure, and that “forcing” two secondary reactions is out of the question (i.e., when we have negligible extent and the time element is also lacking, in which case we cannot appraise a secondary reaction with just a few days).

Furthermore, for those trading a diversified portfolio, the use of alternative secondary reactions (when available) may result in alternative entries and exits, which may lead to a smoothing of the equity curve.

My time is in short supply, so I leave for my next post the analysis of trends for US stocks and US interest rates. As far as US stocks are concerned, you can always stay on top of the current state of trends by subscribing to thedowtheory.com

GOLD AND SILVER

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

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 and 6/22/2020 GLD, bettered its last recorded primary bull market highs unconfirmed. SLV finally deigned to confirm on 7/8/2020, so the primary bull market has been reconfirmed, and the secondary trend has turned bullish (end of the secondary reaction).

Here you have an updated chart.

Primary and secondary trend appraisal if one is not bound by the three weeks rule

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

Personally, and in this specific instance, I wouldn’t trade precious metals this way. However, it is good to show my readers how I’d appraise the secondary reaction if one is to stick to the three-weeks time requirement dogma.

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

Look at the charts below. The grey rectangle displays a sizeable decline, which, nonetheless, did not meet the time requirement as GLD only declined for 8 trading days. SLV fell more than three weeks (17 trading days). Since the pullback did not exceed three weeks on a confirmed basis, there was no secondary reaction.

On 4/9/2020 and 6/22/2020, GLD bettered its last recorded primary bull market highs. SLV finally deigned to confirm on 7/8/2020, so the primary bull market has been reconfirmed. Given that due to the “traditional” interpretation, there was no secondary reaction, the secondary trend remained bullish (what a nonsense!!!) all the time spanning from the last primary bull market highs of 2/24/2020 (SLV) and 3/9/2020 (GLD) to date.

Here you have an updated chart:

Primary and secondary trend appraisal if one is to demand at more than 3 weeks for a secondary reaction to exist

 

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 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 was particularly pertinent if one considers that the primary trend turned bullish on April 9^th, 2020, as unrealized profits are building up.

Off the 06/18/2020 closing lows, both SIL and GDX rallied strongly and on 7/7/2020, both broke up their respective hitherto recorded primary bull market closing highs (6/1/2020 for SIL and 5/19/2020 for GDX). The confirmed breakup has the following implications:

1.      The primary bull market gets reconfirmed.

2.      The secondary reaction is hereby ended and, thus, the secondary trend is now bullish.

3.      The setup for a primary bear market signal (more about it, here) has been canceled. 

Here you have an updated chart:

Primary and secondary trends if one is not bound by the 3 weeks dogma

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 could not declare a secondary reaction, and the secondary trend would have remained bullish.

On 7/7/2020 both SIL and GDX bettered their last recorded primary bull Market highs, which means that the primary bull market has been reconfirmed.

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

 

Primary and secondary trends if one adheres to the more than 3 weeks time dogma for a secondary reaction to exist

General conclusion

Rhea used to say that upon the making of higher bull market highs secondary reactions may develop swiftly and unexpectedly. So, while I don’t know what is going to happen short term, the reading of the charts under the Dow Theory is bullish long term. Furthermore, different sources of confirmation converge, which adds to the bullish picture:

            1. The “normal” confirmation between the two assets involved.

        2. Confirmation across different time-frames (irrespective of a “short” o “long” definition of a secondary reaction, the reading of the trend is bullish).

            3. The precious metals and their ETF minders are also in gear, confirming each other.

Sincerely,

One Dow Theorist