Knights, we are currently in what is called a secondary reaction in the PM space. I am drawn to study what the great market analysts have to say about markets. I don’t see anyone in the modern world analyze markets like the great ones used to do. Instead we have….Cramer! The greatest was William P. Hamilton who wrote a column for the WSJ for almost 30 years. So much can be learned from his 100 year old writings.
Let’s see what he has to say about secondary reactions. After reviewing 30 years of market action he came up with his guidelines. A secondary reaction in a bear market averaged 47 days and it retraced 40-60% of the preceeding primary movement, the exact average was 56% These are of course averages drawn from a wide range of examples.
Let’s put up our GDX and review these numbers:
Here we see the start of the reaction begun on August 5th and we have had a violent retracement of that reaction which actually formed a double bottom. If this secondary reaction to the primary trend was to be “average” we could expect it to top out just under 18 on the 21st of September. That’s something to keep an eye on as average.
Here are some interesting quotes from Hamilton that can be readily applied to our current reaction: ” The market undergoes an almost automatic recovery following a semi-panic break, then sells off again, slowly, day by day and approaches the old level which the first fever of selling had established. After such a panic the average price has always shown a regular movement of 40-60% of the decline is recovered. The future course of the market turns on its ability to absorb the stock.”
There you have a perfect discription of the bottom we put in from the panic on July 20th to the actual bottom on August 5th. It is my contention that the reason we have had such a violent correction back down to the bottom here on 26 August is because of the alighnment of the 25/50 DMA. That’s what you get when they have not yet crossed to the upside.
Other comments by Hamilton: “Secondary reactions are as necessary to the stock market as safety valves to steam boilers….One characteristic of the secondary reaction is that the movement to the primary trend is always much faster than that which occured during the preceeding primary movement”
And Knights here is one for us all:
Rallies in a bear market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.
So that’s what we look for, volume to eventually trail off near the top then put the shorts back on for the next primary trend down leg.