Dow Theory Update for June 21: Secondary reaction in gold and silver and GDX/SIL against the primary bull market

 Primary trends unchanged.

 

GOLD AND SILVER

 

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

 

While it’s subject to interpretation, I explained why I consider the primary trend bullish since 4/21/2021 here.

 

A secondary reaction against the primary bull market has been signaled for gold and silver (GLD and SLV). From its 6/2/21 bull market highs, GLD declined until 6/18/21 for 12 trading days. SLV did so from its 5/17/2021 highs until 6/18/21 for 23 trading days. So we consider the time requirement as fulfilled.

 

As to the extent requirement, things get a little bit trickier than when we deal with assets outside the realm of US stock indexes. We know that we require a minimum movement equal to or larger than 3% for US stock indexes. However, assets like gold, silver, etc., have different volatility than that of US stock indexes. Hence we have to perform a volatility adjustment to determine the equivalent of our 3% threshold for US indexes. For instance, silver (SLV) is more volatile than the S&P500. Hence, for a movement to be meaningful, we have to demand a larger percentage figure.

 

We calculate volatility adjustments as follows. We calculate daily percentage change for both the S&P500 and the asset concerned. We average over 1000 days. If, for example, the volatility of the asset doubles that of the S&P500, then our volatility-adjusted minimum movement will be:

 

As you can see in the table below GLD and SLV have amply exceeded the volatility-adjusted minimum movement.

 

 

So now we  have two options:

 

a) Either a rally lasting at least two trading days exceeding the minimum volatility for at least one ETF develops, in which case, the setup for a primary bear market would be completed.

b) Or the markets continue lower until the last recorded primary bear market lows (3/8/2021 at 157.49 and 3/30/2021 at 22.26 for GLD and SLV, respectively) are jointly broken down, in which case a primary bear market would be signaled.

 

Here you have an updated chart. The orange rectangles display the current secondary reaction:

 

 

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 was signaled as bearish on 11/27/2020, as was explained here.

 

Off the 11/30/2021 bear market lows, both SLV and GLD rallied for 24 trading days until 1/5/2021. So the time requirement was more than met. As to the extent requirement, it was fully met. Both percentage-wise, as in terms of retracements of the previous bear market swing, which started on 11/6/2020. Please spare me the calculations as the chart patterns speak for themselves.

 

So the secondary trend is bullish (secondary reaction against the primary bear market).

 

If we stick to a very strict (or rather misguided) interpretation of the classical Dow Theory, the change of the primary trend from bearish to bullish will occur if either one of the two alternatives below materializes:

 

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 indisputable 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/lows 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 confirmed, the primary trend would be bullish.

 

Below you have the updated charts:

 

 

GOLD AND SILVER MINERS ETFs

 

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

 

The primary and secondary trend is bullish since May 7^th, 2021, as explained here.

As you can see in the table below, the ongoing decline has met the time and extent requirement, so a secondary reaction has been signaled.

 

So now we have two options:

 

a) Either a rally lasting at least two trading days exceeding the minimum volatility for at least one ETF develops, in which case, the setup for a primary bear market would be completed.

b) Or the market continues lower until the last recorded primary bear market lows (3/1/2021 at 30.90 and 3/30/2021 at 38.74 for GDX and SIL, respectively) are jointly broken down, win which case a primary bear market would be signaled.

 

Here you have an updated chart. The orange rectangles on the right side of the charts display the current secondary reaction:

  

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 and secondary trend is bullish since May 7^th, 2021, as explained here.

 

Since the current pullback has not reached at least 15 trading days on SIL, we cannot declare the existence of a secondary reaction. Thus, the secondary trend remains bullish.

 

Here you have the updated charts. The current pullback has been highlighted in grey instead of orange (the color I use to display secondary reactions against primary bull markets), as no secondary reaction has been signaled yet. 

 
 Overview:

The spreadsheet below displays the primary trend in the pairs SLV/GLD and SIL/GDX when we appraise them with either the “shorter-term” or longer-term interpretation of the Dow Theory. Red color displays a primary bear market (cash), and blue displays a primary bull market.

 

Sincerely,

Manuel Blay

Co-Editor of thedowtheory.com