Saturday, November 28, 2020

Dow Theory Update for November 28th: Primary bear market for Gold and Silver signalled on November 27th



 I don’t have much time to write, as I’m busy with the drafting of our monthly Letter to our Subscribers at



Introductory note: In this post, I wrote a thorough explanation concerning the rationale behind my use of two alternative definitions in order to appraise secondary reactions.


A) Market situation if one is to appraise secondary reactions not bound by the 3 weeks and/or 1/3 retracement dogma.


In my last post, I informed that a primary bear market had been signalled for SIL and GDX, the silver and gold stocks ETFs on 11/23/2020. The precious metals stocks tend to lead the metals themselves, so a primary bear market in the stocks was not a good omen for gold and silver.


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


The secondary trend was signaled as bearish (secondary reaction against the primary bull market) on 09/23/2020, as explained here and here.


On 11/23/2020 GLD broke downside its 9/23/2020 secondary reaction closing lows unconfirmed by SLV. Confirmation came yesterday, 11/27/2020 when SLV pierced its 9/23/2020 secondary reaction lows as well. Accordingly, a primary bear market was signalled yesterday.


Below the charts of SLV and GLD displaying the price action from the last days of the secondary reaction (orange rectangles), the rally that set them up for a primary bear signal (blue rectangles) and the final breakdowns (red arrows). The horizontal red lines display the price levels of the secondary reaction lows.


Please mind that the blue rectangles (the rally that followed the secondary reaction closing lows) have amply lasted more than one month and have retraced more than 1/3 of the secondary reaction (which after the bear signal becomes the first down swing of the new primary bear market). So the blue rectangles satisfy the requirements of a secondary reaction as both the time and extent requirement have been fulfilled. This implies that our current (subject to change if prices continue going down and a new secondary reaction unfolds) “re-Buy” point stands at the 11/6/2020 closing highs (highs of the last completed secondary reaction). Long-time readers of this Dow Theory blog know that I play close attention to the lows of the last completed (that is “finished”) secondary reaction. Such an alternative entry/exit is not a fancy of mine, since it was used by Rhea (page 77 of Rhea’s book “The Dow Theory”). I tested its efficacy (that is slightly higher performance and less drawdown) with stocks in a test that spanned more than 40 years. So, pending my testing with precious metals, I feel quite confident in applying this rule. It makes sense, and constitutes an alternative stop. Its use offered us a better exit point at the last March 2020 stock market crash, as you can read here.


So let’s look at the performance of this trade. The table below contains all the relevant data. 


 The trade lasted slightly more than 9 months. So, as far as duration is concerned, it was quite a “normal” Dow Theory trade. A position taken in SLV yielded 22.17% whereas one in GLD 10.54%. When dealing with volatile assets such as GLD and SLV, I favor to split one’s equity in half. One never knows in advance (well, there might be a way of knowing, but this is the subject for a future post) which one of the two assets is going to perform best, so the best thing to do is not to put all the eggs in the same basket. Accordingly, a 50/50% position netted out 16.36%, which is quite good. On the other hand, I don’t advocate for a 50/50% position when dealing with TLT and IEF (US bonds), as IEF has an extremely low volatility and low potential for meaningful profits. In such an instance, I’d settle with a 100% position in TLT. More about it in this post.


Finally, it is worth remembering that based on divergences (which are part of the Dow Theory) I was seeing in the precious metals arena, I warned by the end of July about an impending secondary reaction (which finally became a bear market signal). 

So I see a clustering of primary bear markets in recent weeks. It all started in October with US bonds, last Monday 23rd, the precious metals miners, and yesterday gold and silver. Is this bullish for US stocks? I tend to think yes. As all safe havens are going down. However, if it were not bullish for stocks we’d know: The Dow Theory would get us out before we were inflicted great harm.  


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


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


The secondary trend was bearish (secondary reaction), as explained in my post of October 5th. In that post, I also explained that the secondary reaction determined by strictly demanding three or more weeks for a secondary reaction and 1/3 confirmed retracement was exactly the same as the one determined when one is more flexible

 Accordingly, a primary bear market signal has been signaled too. Since the entry was also on the same date (2/19/2020) than the one taken with more “flexibility”, the amount of profits coincided with those explained above, that is a profit of 16.36% for a 50/50% position.



One Dow Theorist

No comments:

Post a Comment