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Manuel Blay
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Trader and investor. My trading is short-term based (avg trade duration 4-5 days). As investor I'm deeply influenced by Dow Theory
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Dow Theory Investment
  • Dow Theory Update For Dec 20: Gold And Silver In A Primary Bear Market  3 comments
    Dec 20, 2012 5:37 PM | about stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL
    No changes in precious metals stocks ETFs.

    Normally, I start my daily post in this Dow Theory blog by talking about stocks. Today's action in gold and silver beg for a change.

    Gold (GLD) and silver (SLV) closed down today. Silver violated its November 2 secondary reaction low, and with it confirmed the previous violation made by gold 12/18/2012.

    Here you have an updated chart:

     

     

    (click to enlarge)
    A text book primary bear signal in silver (SLV) and gold (SLV)

    Under Dow Theory, the confirmed violation of the secondary reaction lows implies a primary bear market signal. We should nuance that today's signal means that the correction that got started on October 4, 2012 was the first leg of the new bear market. In other words, the market did not turn bearish today but on October 4, 2012; however, under Dow Theory, it has become recognizable today. Some will bemoan the belated identification of a primary bear market. Regrettably, there is no known way for a timing system to detect in real time a change in trend. Furthermore, it should be stressed that the Dow Theory tends to do a very good job a signaling changes of the primary trend well before the investor suffers major damages. As I wrote in my post "Revisiting the 1987 crash", which you can find here, the Dow Theory tends to do a remarkable job at getting investors out of investments on a timely manner.

    In this specific case, GLD closed at 159.73. Its 10/04/2012 high was at 173.61. Thus, after a modest decline of 7.99% (from the highs) a primary bear market has been signaled. Given that gold's volatility is not dissimilar to that of stocks indices, such a decline is very much in line with that observed in primary bear market signals for stocks.

    As to silver, SLV closed at 29. Its 10/04/2012 high was at 33.93. Thus, silver has experienced a 14.52% decline. Given that silver more than doubles gold's volatility (and accordingly, the wise investor should expose less capital to silver), silver's decline is also within reasonable parameters.

    To add insult to injury today gold closed below its 200 days MA. This is also a bearish sign.

    How much should one have made if one had followed the Dow Theory in this specific instance?

    The Dow Theory primary bull market signal was given on August 22. More details here

    The entry price for GLD was 160.54

    The entry price for SLV was 28.92

    The exit price for GLD was 159.73

    The exit price for SLV was 29.

    Thus, GLD holders have experienced a -0.5% loss.

    And SLV holders have experienced a +0.28% gain.

    As you can see, even when facing adversity or, to put it mildly, headwind, the Dow Theory does a pretty good job at containing losses and even securing modest profits. Maybe I am biased by my trader mentality, but I tend to see each position, each investment as a "trade" and the outcome of each one is irrelevant, as performance is built by entering many trades and, more importantly, by not losing much when suffering failed signals. I also know from my trading experience that when using "timing" systems or trend following systems (and the Dow Theory is part and parcel of them) most of the trades sport modest gains. The key is to contain losses. With luck 1 out of 10 trades will be a monster winner. I know this profile is difficult to stomach. However, there is no way around it.

    Of course, now the question is: How much will gold and silver go down? The answer is: We simply don't know. Rhea made clear that neither the duration, nor the extent of a primary bull or bear market can be forecasted in advance. So the primary bear market could finish tomorrow, or maybe it can last one full year. We simply don't know.

    What we do know is that the odds favor lower prices in the weeks and months ahead. A primary bear market signal is a powerful signal, and it is telling us that lower prices are more likely than higher prices. We also know that, irrespective of the particular outcome of each Dow Theory signal (some may go sour), those that follow the Dow Theory tend to outperform those that don't while reducing risk significantly. More about this in my post "Why I love timing. Why I love the Dow Theory as a capital protector" which you can find here.

    Of course, all what I am writing about concerns "paper gold" or GLD and the long-term trend (1-2 years). What I write does not concern physical gold and the secular trend (i.e. 10 years). To know more about the difference between both types of gold, I encourage you to read my post "Not all "gold" is born equal. Gold and the Dow Theory" which you can find here.

    Personally, I believe gold is undergoing a secular bull market and, thus the current primary bear market, doesn't imply the end this secular bull market. However, one should bear two things in mind:

    a) I can be wrong. You know that I tend to be quite skeptical as to long term fundamentally-based forecasts.

    b) Even if right, my bullish assessment belongs in the very long-term and, hence, for shorter term investors and traders, it does not negate the validity of today's primary bear market signal.

    Let's turn to stocks.

    The SPY, the Industrials and the Transports closed up today. Neither the Industrials nor the SPY bettered their respective 09/14/2012 (SPY) and 10/05/2012 (Industrials) highs. Thus, the breakout made by the Transports on 12/18/2012 has not been confirmed yet. The longer the lack of confirmation persists, the more likely a reversal in prices under Dow Theory, since the principle of confirmation is vital for a primary bull (or bear) market to be signaled.

    All in all: The primary trend for stocks remains bearish, and the secondary trend remains bullish.

    Volume was lower today and since stocks closed up, it has a bearish implication. Volume remains neutral in my opinion.

    As to the stocks miners: No news. SIL refuses to trade below the Nov 15 lows. The primary trend remains bullish and the secondary trend bearish.

    Sincerely,

    The Dow Theorist

    Themes: Dow Theory Stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL
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Comments (3)
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  • None of your Dow theory can apply to gold and silver. Too manipulated to have relevance.
    22 Dec 2012, 08:49 PM Reply Like
  • Greetings MCostigane,

     

    As we've written on the topic of Dow Theory, Charles H. Dow was first an economist, then a commodities expert and finally a stock market analyst. Before Charles H. Dow co-founded the Wall Street Journal, he was better known for writing the “Leadville Letters” for the Providence Journal. The “Leadville Letters” reported on Colorado’s silver mining boom in 1879. After co-founding the Wall Street Journal, the lessons learned in the silver mines of Colorado were found to have application on Wall Street. (read more here: http://bit.ly/12ILs8p)

     

    Regarding the issue of manipulation of the markets, we take the Dow Theory view on the topic. Charles H. Dow was very specific about market manipulators. Dow has said that manipulation is a factor of the market in the day-to-day movement. However, the long-term trend of the market cannot be manipulated as demonstrated from the writings of William Peter Hamilton, former editor of the Wall Street Journal.

     

    Hamilton says of manipulation:

     

    “The market is always under more or less manipulation.”

     

    “Even with manipulation, embracing not one but several leading stocks, the market is saying the same thing, and is bigger than the manipulation”

     

    “Major Movements Are Unmanipulated-One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive”

     

    “These discussions [of manipulation] have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over speculation or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing”

     

    “It has been shown that, for all practical purposes, manipulation has, and can have, no real effect in the main or primary movement of the stock market, as reflected in the averages. In a primary bull or bear market the actuating forces are above and beyond manipulation. But in the other movements of Dow’s theory, a secondary reaction in a bull market or the corresponding secondary rally in a bear market, or in the third movement (the daily fluctuation) which goes on all the time, there is room for manipulation, but only in individual stocks, or in small groups, with a well-recognized leading issue”

     

    (Source: Hamilton, William Peter, The Stock Market Barometer, Wiley & Sons, New York, 1922.)

     

    Some have argued that the only reason that the stock market has risen so much is due to the flood of money injected into the system by the Federal Reserve. However, in our article titled “Fed Blameless in Current Run, History Shows It's Typical Market Behavior” (found here: http://seekingalpha.co...) we demonstrated how the markets performed after stock market crashes when there was no Federal Reserve in the period from 1861 to 1912. Our conclusion, Fed or no Fed, the market was going to retrace 66% to 100% of the prior decline (a Dow Theory concept).

     

    The Fed and world central bank manipulation has an impact on the day-to-day and maybe the medium term, however, the long term will exert itself regardless of the manipulation.

     

    Yes, Dow Theory can apply to gold and silver in spite of any perceived manipulation.

     

    Best regards.
    23 Dec 2012, 11:12 AM Reply Like
  • Author’s reply » NLO,

     

    thx for you comment. I wouldn't have been able to explain it better.

     

    Bottom line: Don't fight the trend.

     

    Thx to you all for commenting

     

    Regards
    24 Dec 2012, 05:05 PM Reply Like
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