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Manuel Blay
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Investor and Trader As investor I'm deeply influenced by Dow Theory. I focus on the primary trend (1-2 years). My trading is short-term based (avg trade duration 4-5 days).
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Dow Theory Investment
  • Dow Theory Update For March 24: SIL And GDX Set Up For Primary Bull Market Signal  0 comments
    Mar 24, 2014 5:30 PM | about stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL
    Stocks and precious metals continue declining

    US Stocks

    The SPY, Industrials and Transports closed down. In spite of all the recent declines, the secondary trend has not changed yet. Ditto for the primary trend.

    The primary trend remains bullish, as explained here, and more in-depth here.

    The primary trend was reconfirmed as bullish on October 17th, 2013, and November 13th, 2013 and March 7th, 2014, for the reasons given here, here and here.

    So the current primary bull market signal has survived three secondary reactions.

    The secondary trend is bullish too, as explained here and here.

    Gold and Silver

    SLV, and GLD closed down. For the reasons I explained here, and more recently here, and in spite of all the bullishness than now surrounds gold and silver, the primary trend remains bearish.

    For the primary trend to turn bullish, SLV and GLD should jointly break above the secondary (bullish) reaction highs. As a reminder, the secondary reaction closing highs were made on August 27th, 2013. From such highs the market declined without jointly violating the June 27th, 2013 primary bear market lows.

    By the way, I alerted that the secondary trend turned bullish long ago (on July 22, 2013), when most market pundits were solidly bearish, as you can read here. Now, those very pundits are very bullish as only the sky was the limit. I take the middle road based on the Dow Theory: Since July 22, 2013 there was technically good reason not to be so bearish; on February 14th, 2014, there is no reason to be long term so bullish.

    Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

    On a statistical basis the primary bear market for GLD and SLV is getting old. More than one year since the bear market signal was flashed has elapsed. However, I am extremely skeptical as to the predictive power of statistics. I prefer price action to guide me, and the Dow Theory tells me that the primary trend remains bearish until reversed.

    Furthermore, the June 27, 2013 lows remain untouched. The longer this situation lasts, the higher the odds that something might be changing. But I wait for the verdict of price action.

    As to the gold and silver miners ETFs, SIL and GDX closed down. I warned for several days that GDX exceeded the last recorded secondary reaction highs whereas SIL is failed to do so. Such non confirmation shed doubts as to the continuation of the secondary bullish move. Well, for the last few days GDX and SIL have declined considerably. So considerably, in fact, that they set up for a primary bull market signal.

    Yes, it is not a typo. The set up is for a primary bull market signal. Remember that the primary trend is bearish. From the 12/23/2013 lows a secondary reaction started. The rally for SIL stalled at 2/21/2014 and for GDX at 3/14/2014. Since then prices have declined, as shown in the table below:


     



     GDXdate  SILdate 
    closing high14.69feb 21, 2014 closing high27.73March 3, 2013
    closing low12.83March 24, 2014 closing low24.33March 24, 2014
            
    % decline-0.12661675  % decline-0.12261089  

    You know that according to the Dow Theory the pullback must exceed 3% in at least one index. However, the +3% threshold is valid for stock indices given their lower volatility. Therefore, when I am dealing with higher volatility indices (as SIL and GDX) I perform a volatility adjustment. In other words, I will not satisfy myself with a mere -3% pullback. The pullback must be proportionate to the volatility ratio between the index I am dealing with and the SPY. Here you have the numbers:

     

     



     


     30 days volt   30 days volt
    SPY0.0053  SPY0.0053
    GDX0.0183  SIL0.0205
          
    volt ratio3.45283019  volt ratio3.86792453
          
    Min move10.3584906  Min move11.6037736

    So you can see that the minimum relevant volatility-adjusted move for GDX stands at 10.35% (3% x 3.45) and for SIL at 11.60% (3% x 3.86).

    Since the ongoing pullback exceed 12% for both SIL and GDX (actually it merely suffices with just one index), we have a relevant pullback that sets up SIL and GDX for a primary bull market signal.

    So now there are two alternatives:

    a) Either SIL and GDX arrest their decline, rally and better the last recorded closing highs (shown with blue horizontal lines), which would imply a primary bull market signal.

    b) Or, SIL and GDX continue declining and violate the 12/23/2013 primary bear market lows (shown with red horizontal lines), which would imply a re-confirmation of the primary bear market.

    Here you have an updated chart:

    SIL and GDX set up for a primary bull market under the Dow Theory

    So now things get interesting. Please mind that a setup is not the real thing. So the primary trend has not turned bullish yet (or maybe "never").

    The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GLD are not in a primary bull market.

    The primary trend for SIL and GDX remains, nonetheless, bearish, as was profusely explained here and here.

    Here you have the figures for the SPY which represents the only market with a suggested open long position:

    The secondary trend is bullish, as explained here. In spite of short term bullish accomplishments, SIL and GLD are not in a primary bull market.

    The primary trend for SIL and GDX remains, nonetheless, bearish, as was profusely explained here and here.

    Sincerely,

    The Dow Theorist

    Themes: Dow Theory Stocks: SPY, DIA, IYT, GLD, SLV, GDX, SIL
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