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Dow Theory Update For Jan 24: Primary Bear Market Signaled For Gold And Silver ETFs (GDX And SIL)

|Includes:DIA, GDX, GLD, IYT, SIL, SLV, SPDR S&P 500 Trust ETF (SPY)

Stocks holding their own.

Let's begin our analysis of the markets under the prism of the Dow Theory.

The SPY, Industrials and Transports closed up, thereby making a new confirmed high, which is bullish.

Volume was higher than yesterday's and since, overall (and in spite of NASDAQ action), the major indices closed up. This makes it a bullish volume day. Is a secondary correction at hand?

The primary and secondary trend for stocks remains unambiguously bullish.

Today's real action was in the precious metals arena.

Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) closed down. Market action seems to confirm my reluctant stance to declare the secondary trend as bullish when gold staged a modest rally which didn't even reach 3%. Until this happens, we must conclude that the primary and secondary trend of both precious metals remains bearish.

As to SIL and GDX (the silver and gold miners ETFs) they closed down today. Not only did they close down, but they made significant lower lows. Furthermore, such new lows, as far as I understand, violated the significant lows of 11/15/2012 and 12/05/2012 (secondary reaction lows) and thus has given us a primary bear market signal.

Of course, to pronounce such a verdict we must be sure that the 11/15/2012 and 12/05/2012 lows were the lows of the correction which, while simple in hindsight, is not so easy to ascertain in real time. We never know, which are the relevant lows until we see an upward move off the lows that qualifies as a "rally" under Dow Theory. As you may know by now, when dealing with the Industrials, Transports or SPY the minimum movement to qualify as a "rally" must exceed 3%. When we adjust for SIL and GDX volatility, we demand higher values for an upward movement to be labeled as a significant rally.

In my post of November 29th, 2012, I performed the volatility adjustment for GDX and SIL, and I concluded that the upward movement we were then living didn't qualify as a rally as not even one ETF deigned to exceed the volatility threshold. I encourage you to see the full calculations here.

On November 29th, I rightly concluded (at that time that was the correct decision, so I am not retrocasting) that the upward movement off the 11/15/2012 lows didn't qualify as a rally and "thus, we cannot say that the secondary reaction lows have been made and that its violation would entail a primary bear market and hence our exit point"

However, on 12/12/2012 SIL extended its upward movement by closing at 23.50. Since its 15/11/2012 lows stood at 21.99, this amounts to a 6.86% upward movement. If we look at the volatility adjustments, I conducted for silver, we see that the minimum threshold was 6.71% (or even less as volatility was declining during those days). Thus, on 12/12/2012 a proper rally for SIL existed under Dow Theory.

GDX refused to make higher highs and hence never staged a proper "rally" under Dow Theory. However, as I have written copiously in this Dow Theory blog, for a relevant rally to exist we only need one index. Here you have the explanation.

Thus, once we had a "proper" rally, the 11/15/2012 lows where the lows to monitor for SIL. For GDX, the final secondary reaction lows were made on 12/05/2012 at 45.35. GDX violated its secondary reaction lows on 12/20/2012. However, SIL refused to do so, and hence we had to wait until 01/23/2013. SIL by violating its 15/11/2012 secondary reaction lows confirmed GDX's prior violation of 12/05/2012 and thus a new primary bear market was signaled.

Of course, the primary bear market was in force since 09/21/2012 (last confirmed highs in the primary bull market swing), and the ongoing secondary reaction is to be re-classified now as the first leg or swing of the new primary bear market.

As always, we don't know whether this is a fake signal or the real thing. What we do know is that technically GDX and SIL are in a primary bear market.

I plan to write more about the new primary bear market signal in the coming days.


The Dow Theorist