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Dow Theory Update For December 24th: Secondary Reaction Against The Primary Bear Market For SLV And GLD

Dec. 24, 2020 8:49 PM ETSPDR® Gold Shares ETF (GLD), SLV, SIL, GDX
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Manuel Blay's Blog
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Seeking Alpha Analyst Since 2012

Co-Editor of the top-ranked investment  Letter  thedowtheory.com

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.


  • Secondary reaction for SIL and GDX too.


Introductory note: In this post, I wrote a thorough explanation concerning the rationale behind my use of two alternative definitions in order to appraise secondary reactions.

A) Market situation if one is to appraise secondary reactions not bound by the 3 weeks and/or 1/3 retracement dogma.

The primary trend was signaled as bearish on 11/27/200, as was explained here.

Off the hitherto 11/27 closing low, SLV rallied for 15 trading days, and GLD rallied for 13 trading days. So the time requirement when we allow for some flexibility (as Rhea did) for a secondary reaction was met.

As to the extent requirement, I performed some calculations, which you can see in the table below:

The minimum movement for US stock indexes is 3%. A movement less than that is not to be considered. When we are outside of the realm of US stocks, I think we have to consider the volatility of the asset in question and compare to that of the S&P 500. I calculated a 1000 days moving average of the daily percentage change for both the S&P 500 and GLD and SLV. A more in-depth explanation about volatility-adjusted calculations here.

The table below calculates the retracements. The bear market swing (downward) starts on 11/6/2020, the date of the last recorded secondary reaction highs, and ends on 11/27/2020 (hitherto bear market bottom). The rally got started on 11/27 and carried until 12/21 for SLV and 12/17 for GLD.

So as you can see, there is no doubt as to the existence of a retracement exceeding 1/3 of the previous bear swing.

Now take a look at the charts of SLV (top) and GLD (bottom):

The light blue horizontal lines display the highs of the last completed secondary reaction. Not those of the current one, but the previous one. The breakup of such highs (lows) is a valid Dow Theory signal, as I have profusely explained on this blog. As you can see, SLV did break topside its last recorded secondary reaction highs. However, GLD did not confirm. Absent confirmation, no primary bull market signal was given.

So, where do we stand now?

1. If GLD rallied and broke up above its 11/6/2020 secondary reaction closing highs (blue horizontal line, bottom chart), a primary bull market would be signaled.

2. However, if both SLV and GLD had a decline exceeding the minimum volatility-adjusted movement (see table above), then a setup for a primary bull market would be completed. In such an instance, the confirmed breakup of the 12/21 (SLV) and 12/17 (GLD) highs would signal a new primary bull market. However, as of this writing, the ongoing pullback lacks the time (for SLV) and the extent (both of them) to set up both precious metals for a primary bull market.

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks of movement in order to declare a secondary reaction.

The primary trend was signaled as bearish on 11/27/2020, as was explained here.

Given that the rally starting off 11/27/2020 lows did not exceed 15 days on a confirmed basis, the time requirement has not been fulfilled. Absent the time requirement, I don’t even bother with the extent requirement.

However, SLV broke up above the last recorded secondary reaction highs of 11/6/2020 unconfirmed by GLD. Thus, no primary bull market signal was given.

The charts below display the current situation. The grey rectangles on the right side of the charts show the ongoing rally, which does not qualify as a secondary reaction yet. Hence the grey color, which I use it to denote neutrality (blue is bullish, red/orange is bearish). You can see that SLV (top chart) broke topside the blue horizontal line, which corresponds to the price level of the 11/6/2020 closing highs (highs of the last completed secondary reaction).

While I don’t have the time to give you full calculations, the blue rectangles do qualify as a secondary reaction even when we apply the Dow Theory according to the “mainstream” interpretation. The rally lasted 32 trading days, and it retraced almost 45% for SLV and 44% for GLD of the previous bear swing. So the minimum 1/3 requirement was also met. Accordingly, given that the blue rectangles constitute a secondary reaction, its confirmed breakup would entail a primary bull market signal.

I’d like to write about SIL and GDX, as I see a secondary reaction completed (when being under the “shorter” time-frame). You can find the last update for SIL and GDX here. Hence, we should be on the lookout for a primary bull market setup if we had a stronger pullback. Since tomorrow I will not work, and thereafter comes the run-up to our monthly Letter to Subscribers at thedowtheory.com, it is quite unlikely that I will post until the first days of 2021.

So I wish you all a Merry Christmas and a great and hopefully virus-free 2021.


Manuel Blay

(One Dow Theorist)

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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