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Dow Theory Update For Feb 21: Is A Secondary Reaction Beginning?

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

Is gold making a bottom?

Special note about gold

Yesterday, February 20, 20.77 tonnes of gold were drained from GLD. In other words, GLD inventory decreased by 20.77 tones or 1.57%. As Victor the Cleaner has explained here such "pukes," contrary to conventional wisdom, are bullish, as they denote great avidity for physical gold, which forces GLD to disgorge its gold in order to put out fires elsewhere.

Thus, according to Victor the Cleaner (whose calls in the past were right on the spot) the odds favor that a temporary bottom may be put in gold soon. He even ventures to give a date as to when the surge in gold will occur. In a comment to a post in Fofoa's blog, he wrote yesterday:

If May 2012 is any guide, paper gold will surge by $80/oz on Friday next week or on the following Monday. Also, you will hear about "rumours" in the Financial Times that the BIS was buying gold for some unidentified clients.

Let's see what happens. Will paper gold avoid its decoupling from physical gold thanks to GLD (which is a kind of "central bank" for bullion banks) or will physical "tightness" finally result in a collapse of all fractional, non-physical gold? This is why Victor the Cleaner enigmatically goes on to say:

If you don't get the surge and don't hear anything about the BIS, it is going to get more interesting.

So, for the good of the current system, we better see paper gold rallying again pretty soon. However, until this happens, all those traders not interested in owning physical gold, are well advised to remember that the primary trend of the gold market is down. If paper gold is not ready for its demise and is to stage a new rally, the Dow Theory will let us know soon enough so that traders can participate. Those interested in learning more about physical and paper gold might spend some minutes here.


The SPY, Transports and Industrials closed down today. The primary and secondary trend remains bullish, albeit the technical action seems to be hinting that a secondary reaction may be developing. As per the tenets of the Dow Theory, first we have to see a decline of at least 3% in two or more indices and downward action must last at least 10 days in order to proclaim officially that a secondary reaction has started. This hasn't happened yet, and hence I can only "suppose" that a secondary reaction has started.

Today's volume was higher than yesterday's, which makes it a bearish volume day (as declining prices were joined by increasing volume). This is the four bearish day in a row, which is obviously bearish.

To make matters worse, yesterday we had what renowned technician L.A. Little calls a "volume off the top" reversal bar. Such reversal bar may imply the start of the long awaited secondary reaction. A "volume off the top" bar occurs when the market fails to make a higher high, and it closes lower on high volume. As you can see in the chart below, yesterday was a high-volume day (and it was in itself a bearish volume day). While this pattern doesn't call primary trend changes, it tends to be pretty accurate in signaling the onset of a secondary reaction. Time will tell. Here you have an updated chart displaying the reversal bar.



Volume is bearish

So, all in all, my global assessment of volume is bearish short term hinting at the increased likelihood of a secondary reaction. To recap:

1) We have had four bearish volume days in a row.

2) We had yesterday a "volume off the top" reversal bar.

3) As I wrote here, volume was not supportive of the last stage of this rally.

However, my experience tells me that when volume gets too bearish, a small counter rally is likely to emerge, as the supply of sellers (and short covering) tends to halt the decline. Thus, we find a curious pattern with bearish volume. It tends to beget further weakness, albeit punctuated by a short term (1-3 days) minor rally.

In any instance is good to remember that such observations may be only useful for short term traders. Longer-term investors are well advised to merely buy or sell according to the primary trend. And such trend remains bullish.

Back to gold and silver

Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) closed up today. The primary trend and the secondary trend remain bearish. Yesterday a so called "death cross" was announced by the 200 and 50 days moving average (more about it in "The Big Picture" blog). Here you can see the preciousness of the Dow Theory. The Dow Theory signaled the existence of a primary bear market two months before the 200/50 moving average crossover did.

The primary and secondary trend remains bearish.

As to GDX and SIL (gold and silver miners ETFs), they closed up. The primary and secondary trend remains bearish.


The Dow Theorist