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