Dow Theory Update for January 4nd: Primary bear market setup for SIL and GDX when one takes the long-term interpretation of the Dow Theory

No primary bull market signal when one takes the short-term interpretation of the Dow Theory

 

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.

 

The primary trend was signaled as bearish on 11/23/2020,  as was profusely explained here.

Off the 11/24/2020 closing lows both SIL and GDX rallied 12/17/2020 for a total of 16 trading days. As you can see in the spreadsheet below, SIL rallied 17.76% and GDX 11.58% which is more than the volatility-adjusted minimum movement which is around 6.7% for SIL and 6.4% for GDX. Accordingly, both the time requirement and the extent requirement have been met and we can declare the existence of a secondary reaction against the primary bear market.

 

Following the 12/17/2020 secondary reaction highs, both SIL and GDX declined for 3 trading days. Influenced by Schannep’s Dow Theory, I tend to accept a pullback of even just 2 days for a setup to be completed. So, as far as, time is concerned, the pullback could be setting up SIL and GDX for a primary bull market signal.

 

However, I feel that the pullback lacks enough magnitude as its extent is well below the volatility-adjusted minimum movement, as you can see in the spreadsheet below. Thus, I need to see further decline in order to consider the setup for a primary bull market signal completed. We keep observing the markets, though.

 

The charts below summarize all the price action since the last recorded bull market highs, the secondary reaction that developed (orange rectangle), the rally that setup SIL and GDX for a primary bear market signal (which simultaneously meets the two requirements for a secondary reaction), the secondary reaction (blue rectangles) against the current bear market and the final pullback (small orange rectangle). 

 

The light blue horizontal lines display the closing highs of the first secondary reaction against the primary bear market. As you know the highs/lows of the previously completed secondary reaction are also valid entry/exit signals (a recent example of its application here, and a general discussion here. As you can see in the top chart, SIL broke its 11/06/2020 closing highs unconfirmed by GDX, so no primary bull market signal has been given yet.

 

 

Bottom line: The primary trend remains bearish, the secondary trend is bullish (secondary reaction) and we don’t have a setup for a primary bull market signal yet. However, if GDX broke topside its 11/6/2020 closing highs a primary bull market would be signaled, as the highs of the last completed secondary reaction are an alternative entry and exit signal as well.

 

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.

 

The secondary trend is bearish (secondary reaction) against the primary bull market, as explained here.

 

Off the 11/24/2020 secondary reaction lows, SIL and GDX rallied until 12/17/2020. Such a rally setup both ETFs for a primary bear market. Such a rally has more than met the minimum extent requirement as you can see from the spreadsheet below.

 

 The charts below display the price action since the last recorded primary bull market highs. 8/5/2020. The orange rectangles display the secondary reaction. The blue rectangles show the rally that setup SIL and GDX for a primary bear market signal. The red horizontal lines show the relevant levels to be broken down for a bear market signal to be given.

 

 Bottom line: The primary trend remains bullish. There is a secondary reaction against the primary bull market and a setup for a primary bear market signal has been completed. Given the bullishness I see when I apply the Dow Theory in a shorter time-frame, I doubt the bear market signal will be given. However, we wait for the verdict of the markets.

 

Sincerely,

Manuel Blay

(One Dow Theorist)