Dow Theory Update for March 30: GDX and SIL are in a secondary reaction against the primary bear market

Gold and silver remain in a primary bull market.

 

EXECUTIVE SUMMARY       

1. The primary trend for SIL and GDX when using the “short term” version of the Dow Theory turned bearish (secondary reaction) on 2/22/23. However, there is a secondary (bullish) reaction.

2. If we appraise the trend for SIL and GDX with the “long term” version of the Dow Theory, the primary trend remains bearish and the secondary one bullish.

3. Gold and Silver are in a secondary reaction against the primary bull market (as explained HERE)

 

General Remarks:

This post thoroughly explained the rationale behind using two alternative definitions to appraise secondary reactions. 

GOLD AND SILVER MINERS ETFs

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

As explained HERE, the primary trend was signaled as bearish on 2/22/23. Following the 3/9/23 closing lows, a rally ensued. Such a rally meets the time (at least ten trading days) and extent (in terms of volatility-adjusted minimum movement) requirements for a secondary reaction.

The table below shows the price action that led to the development of the secondary reaction (Step #2):

 

So, now we have three options:

1) if there is a pullback on both ETFs of at least two days that exceed the VAMM, the setup for a potential primary bull market will have been completed.

2) if no such pullback occurs, and both ETFs continue higher until jointly breaking up their 1/25/23 closing highs, a primary bull market will be signaled.

3) if SIL and GDX headed south and jointly broke down below their respective 3/9/23 primary bear market lows, the primary bear market would be reconfirmed, and the secondary reaction canceled.  

The charts below display the most recent price action. The brown rectangles show the secondary reaction against the then-existing primary bull market. The red arrows highlight the breakdown of lows of the last completed secondary reaction, which signaled the primary bear market. The blue rectangles show the current secondary (bullish) reaction against the bear market. The blue horizontal lines display the last recorded primary bull market highs whose breakup would signal a new primary bull market. The red horizontal lines show the 3/9/23 primary bear market lows, whose breakdown would cancel the secondary reaction and reconfirm the primary bear market.

 

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction.

 

The primary trend was signaled as bearish on 3/7/23, as summarized in the Table below:

Following the 3/9/23 closing lows, a rally ensued. Such a rally meets the time (at least fifteen trading days) and extent (in terms of volatility-adjusted minimum movement) requirements for a secondary reaction.

The table below shows the price action that led to the development of the secondary reaction (Step #2):

 

So, as with the short-term rendering of Dow Theory, the longer-term version is confronted with three options:

1) if there is a pullback on both ETFs of at least two days that exceed the VAMM, the setup for a potential primary bull market will have been completed.

2) if no such pullback occurs, and both ETFs continue higher until jointly breaking up their 1/25/23 closing highs, a primary bull market will be signaled.

3) if SIL and GDX headed south and jointly broke down below their respective 3/9/23 primary bear market lows, the primary bear market would be reconfirmed, and the secondary reaction canceled.  

The charts below show the most recent price action. The brown rectangles highlight the secondary reaction against the then-existing primary bull market. The violet rectangles show the rally that followed the secondary reaction lows that set up SIL and GDX for a primary bear market signal. The red horizontal lines highlight the secondary reaction lows whose breakdown signaled the primary bear market. The blue horizontal lines show the primary bull market highs whose confirmed breakup would signal a new primary bull market. 

 

 So, in this specific instance, the trend's long and short-term appraisals give the same verdict: a secondary reaction and the same price levels for a primary bull market signal or a reconfirmation of the primary bear market.

Gold and Silver:

While not the object of this post, the primary trend for GLD and SLV is bullish, as explained HERE.

The table below gives a recap of the primary trend across the precious metals spectrum:

 

 Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Update for March 28: Mini Update on U.S. Bonds

An epic battle is being fought between bulls and bears in U.S. bonds.
The primary trend has been bearish for a long time, as I explained HERE. By the end of October 2022, a secondary reaction started that topped on 12/7/22. Following a strong pullback, the ETF IEF broke topside its 12/7/22 closing high unconfirmed by TLT. On 2/2/23, TLT was about to break up above its 12/7/22 highs but missed. Such non-confirmation told us that the most likely outcome was bonds going down (interest rates up) because the primary trend was and remains bearish. Following the non-confirmation, both ETFs started heading south again. However, TLT and IEF could not pierce their October 2022 lows which would reconfirm the bearish trend. 

So, interest rates are at a crossroads now: 

1) If TLT finally takes out its 12/7/22 closing high, the primary trend would turn bullish, suggesting lower interest rates ahead (and likely the much-announced recession).

2) If TLT does not break up and both ETFs drop until the October 2022 lows are jointly pierced, the primary bear market will be reconfirmed, suggesting higher interest (and likely inflation) ahead. 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Dow Theory Update for March 18: Divergence between the Dow Industrials and Transportation

It's been a long time without analyzing stocks on this blog. Something caught my eye on the charts which I will share with you in this post.

Robert Rhea referred to two types of divergence. Firstly, the one we observe between daily closing prices: One index closes down while the other closes up. In his book “The Story of the Averages” (1934, page 190), Rhea wrote, “when two or more days’ divergence occurs after an extended and excited primary movement, such action is frequently the first indication of a secondary reversal”. The other type of divergence is when one index makes lower highs and lower lows, whereas the other makes higher highs and higher lows. The implications of divergence depend on where we are situated in a chart. If we are near a multiyear top, the most likely implication is that the trend will turn bearish, and the divergence shows money escaping one Index to find shelter in the other one. If divergence occurs after a secondary reaction, divergence tends to show that the reaction is running out of steam. Generally, divergence, which is a stronger warning than lack of confirmation, tells us that a big move is in the making, be it “up” or “down.”

 

The charts below show that the Dow Industrials and Transportation have been seriously diverging. The Dow Industrials (top chart) has been making lower highs and lows, while the Dow Transportation has been making higher highs and lows. The total number of divergence days in the last 20 days has been 4, which is a neutral number (it can get as high as 8 or as low as 0). 

 

Thus, it seems that the next leg, be it “up” or “down,” will be decisive. For the time being, the primary trend, according to the classical Dow Theory, is bullish, and the current pullback is just a secondary reaction. 

And what about the trend when appraised by the Dow Theory for the 21st Century (aka. Schannep’s Dow Theory)? Schannep’s Dow Theory, since 1953, outperformed Buy and Hold by 3.03% p.a., with a marked reduction of both the depth and time in drawdown. Schannep’s Dow Theory achieved such an outperformance by investing only in the major indexes, which is quite a feat.

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Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Dow Theory Update for March 17: How the Dow Theory saved me from buying a sinking ship

 The principle of confirmation matters

The Dow Theory saved my skin thanks to the principle of confirmation.  Around May 2022, I read an article that made a bullish case for the now-failed bank Silvergate. I know that most fundamental narratives have zero predictive value concerning the future stock’s performance. However, this presentation was supposedly so well-grounded that, in a brief lapse of insanity, I decided to try it.  Luckily, my technical instincts told me not to buy Silvergate until there was a breakup of a relevant pivot point (secondary reaction high) CONFIRMED by Bitcoin (the ETF GBTC).  So, I did not want to buy a falling knife, and I also wanted to buy a nascent bull trend, provided GBTC confirmed. My thought was: If bitcoin cannot make higher highs, any new trend for Silvergate is suspect. 

The charts below show that Silvergate bottomed on 7/1/22. The bounce that followed until 7/20/22 could be considered as a secondary reaction against the still-existing bear market. GBTC made its final low on 6/30/22 and rallied until 7/20/22. After such a high, there was a pullback on both assets until 7/26/22, which completed the setup for a potential Buy signal. On 8/2/22, Silvergate broke topside  its 7/20/22 closing low, UNCONFIRMED by GBTC. Given that non confirmation implies that no new trend has been born, I delayed any BUY of Silvergate, until GBTC  confirmed. Such a confirmation never happened, as both assets started heading south.

On 9/6/22, GBTC made a lower low (below its 6/30/22 closing low). Silvergate confirmed by piercing its 7/1/22 closing low on 11/2/22. Confirmed lower lows implied:

a) The primary bear market was reconfirmed.

b) The secondary (bullish) reaction against the bear market was terminated.

c) More importantly: The potential Buy was canceled, and my skin was saved, as I had not bought Silvergate and was waiting for confirmation (which never came).  

The charts below show the dramatic developments:

 

 

The rest is history: We know what happened to Silvergate. Now it trades at around $2 a share (from 94.54 on 8/2/22).

Confirmation works. We should never trade any signal based on one asset when another related one fails to confirm.  

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com