Yesterdaywe discussed that a new primary bull market in gold and silver stocks was under way as per my interpretation of the Dow Theory.
Today, we are going to look into the details of the Dow Theory signal.
For the purposes of this post I will use the silver miners ETFs SIL (for silver miners) and GDX (for gold miners).
The last leg down (primary movement) established new lows for the move. These are the prices and dates to note:
39.34 GDX on 05/15/2012
16.79 SIL on 05/16/2012
Thereafter, there was a rally (a full secondary correction, using Dow Theory terminology) that lasted 24 trading days in GDX. The rally ended on 06/18/12. The high of the rally was 47.73. This amounts to a rally 21.3% off the lows which, under Dow Theory standards is a full-fledged secondary correction (the minimum acceptable movement should be at least 3%). Furthermore, such display of momentum (a 21.3% gain in one month) might be in itself an indication that the tide had turned from bearish to bullish.
As to SIL something similar happened. In order not to bore the reader, I refer to the chart and the tables below for details.
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| Dow Theory signals a bull market in silver and gold miners |
Thus, both rallies qualify as a correction of the previous primary down move, since both movements exceeded 3% and lasted more than 10 trading days. Three percent (3%) is the minimum magnitude under Dow Theory for a movement to be considered as significant. Under Dow Theory a rally (or decline) must last at least 10 trading days to be considered as a correction of the primary move.
From that point on, both markets staged a new leg down. However, both SIL and GDX refused to make a lower low (that is the lows of May were not violated).
Little by little both markets staged a new rally and:
On 8/21/2012 the previous correction HIGH at 47.73 was bettered by GDX.
On 09/04/2012 the previous correction HIGH at 20.03 was bettered by SIL.
So, although with some delay, eventually both GDX also exceed its previous correction high and hence confirmed SIL.
Under Dow Theory we got a primary bull market movement signal.
I’d like to dispel one misconception here. When I say that on 09/04/2012 Dow Theory signaled a new primary bull market, I don’t mean that the bull market started on such date. The bull market started when the last bear market finished. And the last bear market finished when the last primary movement lows were recorded (05/15/2012 and 05/16/2012). However, the end of such bear market cannot be recognized in “real time”. Under Dow Theory one has to wait for a secondary correction to develop, a subsequent decline that fails to break the last recorded lows and a new up movement that exceeds the previous correction highs. Thus, as with any timing system, the Dow Theory can never get us “in” or “out” in real time. However, it is accurate enough to get us “in” or “out” in a sufficient timely manner to make profits and, more importantly, to avoid decimating losses.
Furthermore, it is noteworthy that we are seeing higher highs and lows since 07/24/2012. In each rally GDX and SIL are establishing higher highs and lows. Under Dow Theory higher highs and lows hint at a bull movement of secondary nature at least.
We also see in the cart that SIL is stronger than GDX (red line trending up). The SIL/GDX ratio is clearly in favor of SIL. In my humble opinion, this is a sign that the market is in “risk on” mode. In and by itself it is not enough of a signal but when we weight all evidence available (and the most important one is Dow Theory) I can only say that I don’t see the much feared deflation on the horizon.
In other words, the primary tide of the market has turned bullish for both metals miners and the secondary tide of the market seems, for the time being, also bullishly aligned with it.
For those with an inclination for number crunching, I give you the calculation upon which I have applied the Dow Theory.
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SIL
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Last leg primary movement down
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PRIOR HIGH
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26.02
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02/28/2012
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LAST LOW
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16.79
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05/16/2012
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Amount primary
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0.54973198
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movement
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Correction until June 20, 2012
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Correction High
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20.03
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06/20/2012
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Last low recorded
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16.79
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05/16/2012
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Total rally (sec corr)
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0.19297201
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More than 3% it is a full correction
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total points last leg down
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9.23
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total points correction
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3.24
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% secondary
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corrected
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0.35102925
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It also fulfills the more flexible rule of at least 1/3 retracement
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GDX
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Last leg primary movement down
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PRIOR HIGH
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57.26
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02/28/2012
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LAST LOW
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39.34
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05/15/2012
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Amount primary
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0.45551601
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movement
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Correction until June 20, 2012
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Correction High
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47.73
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06/18/2012
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Last low recorded
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39.34
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05/15/2012
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Total rally (sec corr)
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0.21326894
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More than 3% it is a full correction
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total points last leg down
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17.92
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total points correction
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8.39
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% secondary
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corrected
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0.46819196
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It also fulfills the more flexible rule of at least 1/3 retracement
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Sincerely,
The Dow Theorist
