Stocks and precious metals up.
Let's see what the Dow Theory has in store for us today.
Yesterday I finished my post on this Dow Theory blog by promising information about SIL and GDX. Should we raise our stops? The full answer at the bottom of this post.
Stocks closed up today. There was unanimity.
Volume, however, was muted and being an up day it has, again, a bearish connotation. As you can see in the updated chart below, the red arrows (bearish volume days) are mounting.
As to gold and silver both closed up today. SLV made a higher high unconfirmed by GLD. The primary trend remains bullish whereas the secondary trend remains bearish.
The gold and silver miners ETFs closed up today. The primary trend remains bullish while the secondary trend remains bearish.
Yesterday, I told you to stay tuned as to whether we should change the exit points (until now, the last bear market lows) for SIL and GDX.
The answer is: No. We don't have to change our Dow Theory trailing stops yet.
Here is the "why":
Look at the table below:
|30 days Volatility||Multiple||3% rally adjusted|
As you know, under Dow Theory, once a secondary reaction has been signaled, the rally starting from the lows should at least amount to 3% in one index. Anything less than 3% is meaningless and to be ignored. However, the 3% rule was formulated for stock indices (DOW, SPY) whose volatility is lower than that of SIL or GDX. Hence, we have to make some adjustment. If you look at the table above, SIL's and GDX's volatility more than doubles that of stocks. Hence, a rally for SIL must exceed 6.71% (7.24% for GDX) to be relevant under Dow Theory.
Now look at the table below:
|Highest High||Date||Lowest Low||Date|
|Sec Reac dec||Rally high||Date||Rally advance|
This table shows us the percentage corrected by SIL and GDX as well as the percentage gained in the current rally. We can see that -14% and -16% declines for SIL and GDX fully qualify for a secondary reaction, even after we adjust for their higher volatility. Furthermore, we declared the existence of a secondary reaction well before such retracements were made, since both ETFs broke a "line." More about the line and the secondary reaction here and here
We see that SIL rallied 6.3% whereas GDX rallied 6.02%. We also know that the minimum volatility adjusted rally should amount to 6.71 for SIL or 7.24% for GDX. Even though, we are very close to the qualifying thresholds, which should be met at least by one ETF, the cold truth is that neither of them has staged the minimum required rally.
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. In order to establish a secondary reaction low (in this case the 11/15/2012 lows) as the final lows of the correction, we need a rally exceeding 6.71% for SIL or 7.24 for GDX. After such rally, a violation of the 11/15/2012 would signal a primary bear market and, thereby, our exit point (and new trailing Dow Theory stop, as it happened with gold and silver, as you can read here).
However, given that we have not had a relevant rally under Dow Theory, the violation of the 11/15/2012 would not be a primary bear market signal, but merely a lower low in the ongoing secondary reaction.
Of course, we are not dealing with certainties. The 6.32% rally is quite a rally and it is quite close to the volatility adjusted 6.71% qualifying threshold. Maybe I should bend my own rules and declare the last rally as relevant and thus, establish our exit level at the 11/15/2012 lows. However, I am quite adamant. Our goal is not to be right all the time but merely to have a defined framework of analysis in order to distil order out of the apparent chaos of the markets. And I know that if I follow the time-tested rules of the Dow Theory, I will come out ahead of the game irrespective of the outcome of one individual trade.
All in all: It is too soon to change the exit point for SIL and GDX. Since I cannot say with confidence that the final secondary reaction lows have been established, our exit point remains at the last primary bear market lows of 07/24/2012 (NYSEARCA:SIL) and 05/16/2012 (NYSEARCA:GDX).
The Dow Theorist