Saturday, May 8, 2021

Dow Theory Update for May 8th: Primary bull market for SIL and GDX signaled on May 7th


US stock indexes and GLD & SLV continue bullish






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


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


The primary bear market was reconfirmed (lower confirmed lows) on 3/30/2021 when SIL broke down below its 11/24/2020 bear market lows, as was explained in-depth here.


Off the 3/1/2021 primary bear market lows, GDX has been rallying for 36 trading days. Off its 3/30/2021 lows, SIL rallied for 15 trading days until their secondary reaction closing high made on 4/21/2021. So the time requirement was more than fulfilled. As to the extent requirement, it was also met, as you can see in the table below. More details as to the entrails of the secondary reaction here

Off the 4/21/2021 closing highs, a pullback followed until 4/30/2021 for a total of 7 trading days. As you can see in the spreadsheet below, percentage-wise GDX declined -6.71%, and thus it exceeded the minimum (volatility-adjusted) movement of 6.57% for GDX. More about volatility adjustments here. SIL failed by a hair to reach the minimum volatility-adjusted movement of 7.14%. However, I wrote in the past that the principle of confirmation does not apply to the pullback or rally setting up for a primary bull or bear market signal. Thus, I consider the pullback deep enough to set up SIL and GDX for a primary bull market signal. 



Furthermore, following the 4/30/2021 secondary reaction highs, both SIL and GDX were range-bound for 10 days (From 4/21/201 or even earlier to 5/5/2021). When applying the Dow Theory to US stock indexes, we require at least two confirmed weeks and a range lesser than 5% for a “line” to exist. Given the higher volatility of SIL and GDX versus the S&P500, we can consider the existence of a line if the range remains below 11.90% for SIL and 10.95% for GDX (see Table above). So it is obvious that coincidental with the pullback, we also had a “line”.


On 5/6/2021, SIL broke topside its 4/30/2021 secondary reaction high. GDX did so on 5/7/2021, thus confirming and signaling the primary trend as bullish. Simultaneously, the upper boundaries of the line were jointly broken, which adds to the bullish implication.


So now both the primary and secondary trends are bullish.


Below the updated charts.



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 trend turned bearish on March 30rd, 2021 when SIL finally broke down below its 11/20/2020 secondary reaction lows (details about the secondary reaction and the rally that set up both ETFs for a primary bear market signal here and here). GDX had already violated its 11/20/2020 secondary reaction lows on 2/17/2021. Thus, somewhat belatedly, we got confirmation, and a primary bear market has been signaled.



Rhea wrote that


“[a] secondary reaction is considered to be an important decline in a bull market or advance in a bear market, usually lasting from three weeks to as many months, during which interval the price movement generally retraces from 33 per cent to 66 per cent of the primary price change since the termination of the last preceding secondary reaction” (emphasis added)



My interpretation of the word “from” (from three weeks) implies that just 15 trading days (3 weeks) is not enough. 15 days is just 3 trading weeks. So “from” means at least 16 trading days. However, I may be wrong. After all, I am not a native speaker.  


Off the 3/1/2021 primary bear market lows, GDX has been rallying for 36 trading days. Off its 3/30/2021 lows, SIL rallied for 15 trading days until their secondary reaction closing high was made on 4/21/2021. So, strictly, the time requirement would not have been met, given that SIL falls short of one day.


However, we have to put things into perspective:


1. Rhea wrote, “usually lasting from three weeks”. Not “always”.

2. GDX rallied for 36 trading days, which seems to add “time”. No wonder Schannep averages the total time (i.e., 15+36/2).

3. The retracement requirement (which is flexible, by the way), has been more than met. Please spare me the calculations here, but both SIL and GDX retraced more than 1/3 of the previous bear swing.

4. The rally off the respective lows has been very strong more than doubling the minimum volatility-adjusted movement (at 4/21/2021 SIL had rallied 15.69% and GDX 19.19% off their respective bear market lows). So we are dealing with a strong movement. You know my rule of thumb: The more extent (rally, decline), the less stringent with the time requirement.

5. The existence of a line (see more above) and its topside breakout adds to the bullish case.


While I may accept being more “conservative” when using a longer time frame. I feel that refusing the existence of a secondary reaction (and the subsequent setup and bull signal) because one day is missing in SIL is equivalent to being blind. One must put things in perspective. As always interpretation is key.


The charts shown above also reflect the current situation when one takes the longer time-frame. 


So I consider both the primary and secondary trend bullish.



Manuel Blay

(One Dow Theorist)







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