Dow Theory Update For Nov 13: Secondary Reaction For Gold And Silver Miners ETF Signaled Today

Nov. 14, 2012 4:13 AM ETSPY, DIA, IYT, GLD, SLV, GDX, SIL
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Investor and Trader As an investor I'm deeply influenced by Dow Theory, especially by the book "The Dow Theory for the 21st Century". I focus on the primary trend (1-2 years). My trading is short-term based (avg trade duration 4-5 days).

In addition to US stock indexes, I have successfully expanded the application of the Dow Theory to precious metals, their miners, and US interest rates. The Dow Theory is a more accurate timing device that moving averages, breakout systems, etc.

Stocks down. No technical change yet.

Let's gets started with our Dow Theory commentary for today.

Stocks closed down today. The Transports, in spite of closing down, continue displaying greater relative strength. I don't know whether this is a plus or a minus because the longer it takes for the Transports to violate their 09/28/2012 secondary reaction lows, the more belated will be the primary bear market signal and the more likely unrealized gains (at today's close +1.24% since June 29) may be vaporized. However, we cannot jump the gun, and we cannot anticipate a primary bear market signal until it really exists. You can find the relevant chart in this Dow Theory blog to determine when a bear market signal will be flashed here.

Volume was clearly bearish, as today's volume was larger than yesterday's on a down day. What I find insidious in the pattern of volume is that volume increases in down days, but not to the extent to label it a climax day. A monstrous volume day might denote the last gasp of the bear forces. However, what we are seeing is far from denoting a climax. Nonetheless, we must bear in mind that trends are made by price action and not volume. Volume merely increases or decreases the odds for a trend to last (i.e. bullish action not confirmed by volume is less likely to hold than bullish action confirmed by volume but lack of volume confirmation doesn't mean that the trend is doomed in all instances).

Here you have an updated chart of the volume. In pivot days, you can see two arrows. The lower arrow corresponds to the volume pattern of the day; the higher arrow corresponds to bullish or bearish ascription of volume at the pivot.



Volume turning bearish short term

All in all, the primary trend remains bullish and the secondary reaction seems to be running its course.

The big news today is that a secondary reaction has been signaled in the gold and silver miners ETFs (SIL and GDX). If you go back to this post on this Dow Theory blog, you will see that already on October 24, I was paying lots of attention to a "line" that both SIL and GDX were forming. Please re-read the post to get a clear picture.

Here you have the chart that says it all.



Secondary reaction on SIL and GDX signaled on 11/13/2012

Today, the line has finally been violated by SIL (GDX already violated the lower boundary of its line on 10/23/2012. By confirming GDX violation, SIL has signaled the existence of a secondary reaction for both GDX and SIL. Now we can go backwards and date the start of the secondary reaction on 09/21/2012 date when the last confirmed highs were made for both ETFs. The amount hitherto retraced from the previous primary swing is ca. 20.6% for SIL and 34.3% for GDX, which is a modest amount for a secondary reaction. So more bearish action is likely in the coming days.

As you know, I find this to be good news. Under Dow Theory, we do need secondary reaction in order to be able to rise our trailing stops when, hopefully, such reactions finish by the making of new highs. In the absence of a secondary reaction, we would be stuck with the original stop at the last bear market lows, which would live lots of unrealized gains exposed to "vaporization." While secondary reactions are unnerving, we must learn to live with them. If this sounds queer to you, I kindly invite you to read "Why Dow Theory matters: Outstanding Risk Reward Ratio thanks to the Dow Theory's trailing stop" which you can find here.

Gold and silver closed down today. Technically, nothing has changed. The primary trend remains bullish whilst the secondary trend is down.


The Dow Theorist

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