Thursday, April 22, 2021

Dow Theory Update for April 22: A not so clear-cut primary bull market signaled on 4/21/2021 for GLD and SLV

 

At the very least, it is a good risk-reward buy

 

Today I am going to focus exclusively on SLV and GLD.  Please find the most recent post on US stock indices, SIL/GDX and TLT/IEF here.

http://www.dowtheoryinvestment.com/2021/04/dow-theory-update-for-april-16.html

 

GOLD AND SILVER

 

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

 

Please read carefully my 4/5/2021 post and the link contained herein.

http://www.dowtheoryinvestment.com/2021/04/dow-theory-update-for-april-5-minor-non.html

 

I quote the final paragraphs of such a post:

I spot, though, three developments on the charts.

 

Firstly, GLD is slightly diverging. Take a look at the charts below. Following the 3/5/2021 closing lows, SLV trended downwards. On the other hand, following the 3/8/2021 closing lows, GLD trended slightly upwards.

 

Secondly, starting 3/23/2021, SLV violated its 3/8/2021 minor low (please mind the word “minor”) for several days until 3/30/2021. All this array of lower lows was not confirmed by GLD, whose primary bear market low 3/8/2021 remains unpierced.

 

Thirdly, I explained the formation of a “line” (narrow range) on my April 1st, 2021 post.  Such a line was broken by SLV unconfirmed by GLD, which, if not bullish, is undoubtedly not bearish, at least short-term.

 

So, while it is much too early to declare the primary bear market dead, I see for the first time since late November 2020 the first “green shoots” within a primary trend that remains bearish to this day. A confirmed breakup of SLV’s line top (3/17/2021 @24.42) and GLD’s (3/17/2021 @163.61), and depending on the time of the rally that would lead to such a breakup, one could consider a change of the primary trend from bearish to bullish. We have to mark the vital 3/17/2021 closing highs on our charts.

 

Well, the breakup I was alluding to in my 4/5/2021 post occurred 4/21/2021. SLV broke topside its 3/17/2021 line closing high. GLD had done so on 4/8/2021. The table below summarizes the most relevant facts concerning the current technical situation:

 


As you can see, the rally off the last recorded lows lasted 15 days for SLV and 22 for GLD. Percentage-wise, from the bottom to the breakup day high, SLV rallied 10.96% and GLD 4.46%. 

 

As a reminder, the breakup concerns the upper boundary of a “line”, not of a secondary reaction high. Rhea wrote that the breakup (down) of a line indicates:

 

“a change of the general market direction of at least secondary, and occasionally even of primary, character”.(The Dow Theory, 1932, Barrons, page 80).

 

I feel in this specific instance, the change of the trend is of primary character for the following reasons:

 

1. The secondary trend was already bullish within a primary bear market. Thus, the breakup of the line does not change the secondary trend from bearish to bullish. It instead adds to the already existing secondary bullish trend. While two secondary bullish readings do not necessarily equate to a primary bullish trend, I feel it increases the odds for changing the primary trend from bearish to bullish.

2. There has been divergence and a non-confirmation of lower lows, which is bullish (see above).

3. The secular trend is bullish (so there is a tail-wind for bullish movements).

4. Since the last primary bull market top, SLV & GLD have been declining for ca. 8 months. So time-wise, the primary bear market is getting old; particularly when measured against a secular bull market.

5. The rally off the respective primary bear market lows has proceeded smoothly (and hence took several days until the final breakup; it was not a volatility flare). I favor (and research confirms) rallies with gentle daily advances and a majority of “up” days, rather than rallies with abrupt “up” days followed by “down” days. The less "zig-zag", the more likely the trend will continue into the future.

6. Finally, as shown on the table below, taking a trade right now has a relatively tight stop-loss (last recorded lows). If a real good rally materialized, we would be having a good risk-reward. Waiting for a more “text-book” Dow Theory signal entails a much looser (and hence risky stop-loss). More about two alternative Dow Theory bull market signals some paragraphs below.

 


So based on all the preceding considerations, I feel I can act as if the primary trend had turned bullish. Of course, the confirmed violation of the 3/30 (SLV) and 3/8 (GLD) bear market lows, would imply a bearish reading for both the primary and secondary trend.  

 

I final note on volatility. SLV was well above the minimum movement adjusted for volatility (more about this concept here). GLD is a little bit below it. However, given that we are not dealing with a “typical” signal, and given that the rally off the lows till breakup day lasted 15 (SLV) and 22 (GLD) days, I feel I can live with a 4.46% rally for GLD.

 

Those wanting to play more conservative should wait until a 100% interpretation-free Dow Theory signal is given. Be advised, though, that both Schannep (Capitulation indicator, here and here) and Rhea know how to recognize bottoms with a good risk/reward ratio and act swiftly. 

 

There are two alternative “interpretation-free” Dow Theory primary bull market signals. The first to be materialized would change the primary trend from bearish to bullish:

 

1. The first one, entails the breakup of the last secondary reaction closing highs (1/5/2021). SLV broke them up on 2/1/2021, unconfirmed by GLD. So, once GLD broke up its 1/5/2021 secondary reaction highs, it’d be undisputable that the primary trend has turned bullish.

 

2. The second one entails the breakup of the highs of the last completed secondary reaction (the first one of the current bear market).  I have written profusely (i.e., here and here) about the importance of the highs/low of the last completed secondary reaction (not the current one, but the previous one). The closing highs of such a reaction were made on 11/6/2020 for both SLV and GLD. On 12/7/2020, SLV broke up above its closing highs, unconfirmed by GLD. Once GLD deigned to confirm, the primary trend would be bullish. 

 

Please spare me the calculations, but  waiting for a "clear" "interpretation-free" Dow Theory signal, would imply a much broader stop-loss, as the breakups would occur at a very high level (i.e. ca. -14% for GLD).

 

Here you have the updated charts, which show all the action since July 2020 when several divergences alerted about a top, the first downswing of the primary bear market (orange  rectangles on the left), and the two bullish secondary reactions against the primary bear market (blue rectangles). The most recent line and its bullish resolution are shown as a white rectangle.


 

Sincerely,

Manuel  Blay

(One Dow Theorist)



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