Friday, September 11, 2020

Dow Theory Update for September 11: Long term bullishness remains while short term there is some stalling.

 

 Precious metals could be nearing a secondary reaction. Not there yet.

 

US STOCKS

Schannep’s Dow Theory (more properly: The Dow Theory for the 21st Century)

 

 


At 09/02/2020, the primary trend was bullish since April 6th, 2020, as was explained here.

 

The April 6th, 2020 Buy signal (caused by a Bull market definition) was not an easy one to act upon, as it was given at ca. 19% (for the S&P 500) off the bear market bottom. Fear that the market was already overextended and fear of a significant loss should the market decline revisiting the 03/23/2020 bear market lows resulted in some investors expressing concern. An in-depth study about the viability of the Buy signal of April 6th, 2020, is available in our June 1st, 2020 Letter to Subscribers of thedowtheory.com. Since many followers of this blog have become Subscribers, please read carefully the June 2020 Letter. For those still sitting on the sidelines, I encourage you to become Subscribers.

 

Subsequent price action is, once again, proving that those fears were unwarranted. The current primary bull market signal is very likely to end up as a winning trade (barring a huge overnight gap down). As with all bull markets, this one has to climb its own wall of fear.

 

The secondary trend was declared bearish on 06/26/2020, as was explained here.

 

On 7/20/2020, the S&P 500 bettered its 6/8/2020 primary bull market highs unconfirmed. On 8/4/2020 and 8/10/2020, the Transports and the Industrials confirmed, so the secondary reaction was canceled, and the primary bull market reconfirmed.

 

“Rhea’s /classical" Dow Theory

 

A) Market situation if one is to appraise secondary reactions not bound by the 3 weeks dogma.

 

The primary trend is bullish since 4/29/2020, as explained here. This primary bull market signal was determined by just demanding 13 and 18 trading days to appraise the secondary reaction that led to the primary bull market signal.

 

I recently wrote a “saga” (here, here and here) where I made clear that neither the 15 days time requirement nor the 1/3 extent requirement is carved in stone. While most secondary reactions will last more than 15 days and retrace 1/3 of the previous swing, one should remain flexible, even under the “Rhea/classical” Dow Theory.

 

On 8/4/2020 and 8/10/2020, the Transports and the Industrials bettered their 6/8/2020 primary bull market highs and, thus, the primary bull market was confirmed. Please mind that no secondary reaction was canceled by the higher highs, as the decline did not reach the necessary time and (more importantly) extent proportions to qualify as a secondary reaction (more details in this post)

 

Here you have an updated chart:

 

 


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

 

For those strictly demanding more than 15 confirmed days of declining prices, the primary bull market was signaled on 5/26/2020. More details about this alternative signal are to be found in our June 1st, 2020 Letter to Subscribers.

 

Following the 6/8/2020 highs, both the Industrials and Transports declined for several days. However, neither index exceeded 15 trading days of decline, so the time requirement for a secondary reaction was not met. So no secondary reaction was signaled.

 

On 8/4/2020 and 8/10/2020, the Transports and the Industrials bettered their 6/8/2020 primary bull market highs and, thus, the primary bull market was confirmed.

 

Here you have an updated chart:

 


 GOLD AND SILVER


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

 

The primary was signaled as bullish on 02/19/2020, as explained here.

 

Following a sharp decline, SLV penetrated its last recorded primary bear market lows on 3/12/2020. GLD declined but on a much more muted basis and did not confirm. Hence, no primary bear market signal. Rhea (page 77 of his book, Fraser Edition 1993) recognized as a valid exit point the confirmed penetration of the closing lows of the last primary bear market (red horizontal lines on the charts below).

 

One could consider the decline as a secondary reaction. An in-depth explanation about it here.

 

On 4/9/2020 and 6/22/2020 GLD, bettered its last recorded primary bull market highs unconfirmed. SLV finally deigned to confirm on 7/8/2020, so the primary bull market has been reconfirmed, and the secondary trend has turned bullish (end of the secondary reaction).

 

Preceded by some divergences which were explained here, on 8/10/2020 and 08/06/2020, SLV and GLD made their last recorded highs. On 8/11/2020 SLV made the last recorded lows whereas GLD did so on 8/12/2020. So the decline that followed the last recorded lows does not remotely fulfill the time requirement for a secondary reaction.

 

Here you have an updated chart.

 


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

 

Personally, and in this specific instance, I wouldn’t trade precious metals this way. However, it is good to show my readers how I’d appraise the secondary reaction if one is to stick to the three-weeks time requirement dogma.

 

The primary was signaled as bullish on 02/19/2020, as explained here.

 

Look at the charts below. The grey rectangle displays a sizeable decline, which, nonetheless, did not meet the time requirement as GLD only declined for 8 trading days. SLV fell more than three weeks (17 trading days). Since the pullback did not exceed three weeks on a confirmed basis, there was no secondary reaction.

 

On 4/9/2020 and 6/22/2020, GLD bettered its last recorded primary bull market highs. SLV finally deigned to confirm on 7/8/2020, so the primary bull market has been reconfirmed. Given that due to the “traditional” interpretation, there was no secondary reaction, the secondary trend remained bullish (what a nonsense!!!) all the time spanning from the last primary bull market highs of 2/24/2020 (SLV) and 3/9/2020 (GLD) to date.

 

Preceded by some divergences which were explained here, on 8/10/2020 and 08/06/2020, SLV and GLD made their last recorded highs. On 8/11/2020 SLV made the last recorded lows whereas GLD did so on 8/12/2020. So the decline that followed the last recorded lows does not remotely fulfill the time requirement for a secondary reaction.

 

Here you have an updated chart:

 


  GOLD AND SILVER MINERS ETFs

 

A)   Market situation if one is to appraise secondary reactions not bound by the 3 weeks dogma.

 

One legitimate interpretation of the appraisal of secondary reaction under the Dow Theory let us conclude that the primary trend turned bullish on April 9th, 2020, as explained here.

 

In this post, I explained that the secondary trend could be interpreted as being bearish (secondary reaction against primary bull market).

 

I feel this specific appraisal of the secondary reaction was particularly pertinent if one considers that the primary trend turned bullish on April 9th, 2020, as unrealized profits are building up.

 

Off the 06/18/2020 closing lows, both SIL and GDX rallied strongly and on 7/7/2020, both broke up their respective hitherto recorded primary bull market closing highs (6/1/2020 for SIL and 5/19/2020 for GDX). The confirmed breakup has the following implications:

 

1.      The primary bull market gets reconfirmed.

 

2.      The secondary reaction is hereby ended and, thus, the secondary trend is now bullish.

 

3.      The setup for a primary bear market signal (more about it, here) has been canceled. 

 

Here you have an updated chart:

 


 On 8/5/2020 both SIL and GDX made their last recorded closing highs. There was a small pullback that finished on 8/11/2020. Hence, the decline spanning just 4 trading days does not fulfill the time requirement for a secondary reaction.

 

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

 

For those wishing to adhere to a more strict interpretation when determining secondary reactions, the primary trend would have remained bearish (bearish signal given on March 11th, 2020, as explained here) until 05/15/2020. On 05/15/2020 SIL finally broke up its last recorded primary bull market closing highs of 12/26/2019, and a primary bull market was signaled. GDX had done so on 4/22/2020. Thus, even under the most restrictive interpretation of the Dow Theory, the primary trend was signaled as bullish on 05/15/2020.

 

And what about the secondary trend if we were playing “conservative”? On 06/01/2020, SIL made its last recorded primary bull market highs. GDX had done so on 05/19/2020. Both ETFs made their last recorded closing lows on 06/18/2020. Thus, SIL declined for 13 trading days and GDX for 21 days. Given that SIL did not drop more than 15 days, under a “mainstream” reading of the classical Dow Theory, we could not declare a secondary reaction, and the secondary trend would have remained bullish.

 

On 7/7/2020 both SIL and GDX bettered their last recorded primary bull Market highs, which means that the primary bull market has been reconfirmed.

 

On 8/5/2020 both SIL and GDX made their last recorded closing highs. There was a small pullback that finished on 8/11/2020. Hence, the decline spanning just 4 trading days does not fulfill the time requirement for a secondary reaction.

 

Here you have a chart depicting the most recent price action.

 

 

US INTEREST RATES

General Remark:

TLT is the iShares 20 years + Treasury bond ETF. More about it here

IEF is the iShares 7-10 years Treasury bond ETF. More about it here.

Thus, TLT tracks longer-term US bonds, whereas TLT tracks middle term US bonds. A bull market in bonds entails lower interest rates.

 

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

 

If one appraised the secondary reaction that led to the setup that resulted in the primary bull market signal, the primary bull market was signaled on 11/19/2018. The signal of 11/19/2018 was obtained by being satisfied with just 14 trading days for TLT and 15 days for IEF.

 

From the 03/09/2020 closing highs, both ETFs declined until a bottom was made on 3/18/2020. The decline just took 7 trading days, and, thus, one could argue that the time requirement for a secondary reaction against primary bull market had not been met. However, given the magnitude of the shake-up, retracement of the last bull market swing, and the total percentage of the declines, I’d be inclined to shorten the time requirement so that the 03/18/2020 closing lows became the lows of a secondary reaction of just seven trading days.

 

From the secondary reaction lows of 3/18/2020, both ETFs bettered their last recorded primary bull market highs of 3/9/2020. IEF did so on 04/01/2020, whereas TLT did so on 8/4/2020, thereby reconfirming the primary bull market, as was explained in-depth here.

 

By the way, TLT’s confirmation of the higher highs made by IEF took quite a long time, namely more than 4 months. Belated confirmations tend to be a warning sign about the underlying health of the trend.

 

The secondary trend is bearish (secondary reaction against the primary bull market) as was explained here.

 

Here you have an updated chart:

 


 

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement in order to declare a secondary reaction.

 

The signal of 12/18/2018 was obtained by being strict and demanding on a confirmed basis at least 15 trading days on both ETFs.

 

Since the pullback from 03/09/2020 to 03/18/2020 spanned just seven trading days, and despite its vast magnitude, we could not declare the existence of a secondary reaction if bound by the three weeks' time requirement dogma. Subsequent declines did not close below the 03/18/2020 closing lows, and hence no secondary reaction was signaled.

 

On 04/01/2020, IEF bettered its last primary bull market closing highs of 03/09/2020 unconfirmed by TLT. On 08/04/2020, TLT finally deigned to confirm and broke up its 3/9/2020 primary bull market highs, and, hence, the primary bull market was reconfirmed. An in-depth explanation here.

 

In spite of the most recent pullback, the secondary trend remains bullish as was explained here.

 

Here you have an updated chart:

 

 Sincerely,

One Dow Theorist

Wednesday, September 2, 2020

Dow Theory Update for September 2nd: US bonds are in a secondary reaction when one takes a somewhat shorter time frame.

 

No secondary reaction when one is bound by the 1/3 confirmed retracement dogma

 

This post is being penned on Saturday, August 29th, but will likely be posted on Wednesday 9/2/2020. I am looking at the charts today, and I see now changes in my analysis of trends.

 

Today I’ll focus on US bonds. This post may not be an easy read, as it’s packed with lots of analysis. However, hard work is the price we have to pay for performance (40% for TLT since the Buy of 11/19/2018) and, more importantly, drawdown reduction. Nonetheless, it is good to keep sober and bear in mind that a dry spell of bad trades is always around the corner. The important thing is to stay disciplined and not throw in the towel when a couple of sour trades eventually hit.  

 

US INTEREST RATES

General Remark:

TLT is the iShares 20 years + Treasury bond ETF. More about it here

IEF is the iShares 7-10 years Treasury bond ETF. More about it here.

Thus, TLT tracks longer-term US bonds, whereas TLT tracks middle term US bonds. A bull market in bonds entails lower interest rates.

 

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

 

If one appraised the secondary reaction that led to the setup that resulted in the primary bull market signal, the primary bull market was signaled on 11/19/2018. The signal of 11/19/2018 was obtained by being satisfied with just 14 trading days for TLT and 15 days for IEF.

 

From the 03/09/2020 closing highs, both ETFs declined until a bottom was made on 3/18/2020. The decline just took 7 trading days, and, thus, one could argue that the time requirement for a secondary reaction against primary bull market had not been met. However, given the magnitude of the shake-up, retracement of the last bull market swing, and the total percentage of the declines, I’d be inclined to shorten the time requirement so that the 03/18/2020 closing lows became the lows of a secondary reaction of just seven trading days.

 

 

From the secondary reaction lows of 3/18/2020, both ETFs bettered their last recorded primary bull market highs of 3/9/2020. IEF did so on 04/01/2020, whereas TLT did so on 8/4/2020, thereby reconfirming the primary bull market, as was explained in-depth here.

 

By the way, TLT’s confirmation of the higher highs made by IEF took quite a long time, namely more than 4 months. Belated confirmations tend to be a warning sign about the underlying health of the trend.

 

The very day of TLT’s confirmation (8/4/2020) was the day of the market top. From that date, both TLT and IEF have declined. There was a first pullback which ended on 08/14/2020 (TLT, 8 trading days) and 08/13/2020 (IEF, 7 trading days). Percentage-wise this pullback amounted to -4.52% for TLT and -1.37% for IEF.

 

Retracements are measured from the last recorded secondary reaction lows (3/18/2020). As you can see in the spreadsheet below, the pullback finishing on 8/14 and 8/13/2020 was well under 30% for both ETFs.

 

The spreadsheet below summarizes all the data:

 


 Given that we have not seen significant volatility (the pullback did not even reach 5% for TLT), that the retracement has not even managed to reach 1/3 (even on an unconfirmed basis) and that it has just been 7 and 8 days, I feel I cannot consider such a pullback a secondary reaction, even if one is to be flexible and do away with the three weeks and 1/3 retracement dogma. I can settle with a pullback spanning just 7 days, but, as a trade-off, I want to see more significant volatility, which is obviously absent.

This is why I display the pullback finishing on 8/14 and 8/13/2020 in grey color. Readers of this blog know that I use “blue” to display a bullish secondary reaction and “orange” to display a bearish one. Grey is the color I use to show neutrality. Here you have an updated chart, which also shows the secondary reaction when one takes some more days into account (orange rectangles on the right side of the charts):

 


Furthermore, the mini-rally that started off the 8/14 and 8/13/2020 closing lows and ended on 8/21/2020 did not reach the minimum volatility-adjusted threshold, as you can see on the table below:


Thus, any way you cut it, the pullback finishing on 8/14 (TLT) and 8/13/2020 (IEF) cannot be qualified as a secondary reaction, even if one is kind of flexible.

On the other hand, I feel that the lows made on 8/28 (TLT) and 8/27 (IEF) do qualify as a secondary reaction when one is not bound by the 1/3 confirmed retracement dogma. Let’s look at the entrails of this larger pullback.

First off, the decline lasted 18 trading days for TLT and 17 for IEF. No doubt as to the fulfillment of the time requirement.

 As to the extent requirement, TLT has retraced 38.39% of the advance that started off the secondary reaction lows of 3/18/2020. This is a decent retracement. It is true that is has been unconfirmed as IEF merely retraced 25.90%. I have written, though, that Rhea in his book “The Story of the Averages” boldly wrote that the retracement requirement need not be confirmed. He noted that confirmation could come in direction (which we did, as both ETFs declined). Rhea identified many secondary reactions that did not comply with the 1/3 retracement requirement on a confirmed basis. 

Furthermore, percentage-wise, TLT declined -6.09% (while its minimum volatility-adjusted movement stands around 2.17-2.44%, depending on the time one takes for the calculation) and IEF -1.53 (with a minimum volatility-adjusted movement around 0.70 – 0.95%). More about the minimum volatility-adjusted movement, here.

So given the sheer magnitude of the decline, the existence of a retracement clearly exceeding 1/3 in TLT and a sufficient amount of time (18 and 17 trading days), I consider the decline starting on 8/4/2020 and (for the time being) ending on 8/28 (TLT) and 8/29/2020 (IEF) as a secondary (bearish) reaction against the primary bull market.

Here you have a spreadsheet containing all the data. 

 


A position taken in TLT on 11/19/2018 (date of the primary bull market signal) is currently showing an unrealized profit  of 40.07% (at the close of 8/29/2020). An extra reason not to be too sluggish when it comes to defining secondary reactions that may eventually lead to a sell signal. 

 

Finally, volume on 8/27/2020, the day where the 8/14 (TLT) minor lows were broken down was notably higher than that seen at the minor lows (19.86 million on 8/27, 8.4 million on 8/28 for TLT versus ca. 6.4 million on 8/14. For TLT volume was roughly similar both on 8/13 and 8/27). While volume is notably less dependable than price action, the increase in volume at the breakdown point seems to further validate the existence of the secondary reaction.


B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement in order to declare a secondary reaction.

 

The signal of 12/18/2018 was obtained by being strict and demanding on a confirmed basis at least 15 trading days on both ETFs.

 

Since the pullback from 03/09/2020 to 03/18/2020 spanned just seven trading days, and despite its vast magnitude, we could not declare the existence of a secondary reaction if bound by the three weeks' time requirement dogma. Subsequent declines did not close below the 03/18/2020 closing lows, and hence no secondary reaction was signaled.

 

On 04/01/2020, IEF bettered its last primary bull market closing highs of 03/09/2020 unconfirmed by TLT. On 08/04/2020, TLT finally deigned to confirm and broke up its 3/9/2020 primary bull market highs, and, hence, the primary bull market was reconfirmed. An in-depth explanation here.

 

The last recorded primary bull market highs were made on 8/4/2020. From that date, TLT declined until 8/28/2020 for 18 trading days, whereas IEF declined until 08/27/2020 for 17 trading days. Hence, the time requirement for a secondary reaction has been met.

 

As to the extent requirement, we have had a very modest retracement of the previous bull market swing of just 28.51% for TLT and 14.6% for IEF. As a reminder, retracements are measured by taking the last secondary reaction lows until the last primary bull market highs, and then considering the ongoing pullback. Given that as per this “strict” interpretation of the Dow Theory, we didn’t have a secondary reaction on 3/18/2020, we have to go back to 11/8/2019 and 12/23/2019, which were the closing lows of the last completed secondary reaction. Of course, this makes quite a considerable bull swing, and the current decline has barely made a dent in it.

 

So, if we are to take a strict reading of the Dow Theory and demand 1/3 retracement, we are still far from it, and, hence, the extent requirement has not been met, and, thus, no secondary reaction has been signaled yet. 

 

The table below shows all the calculations:

 


Here you have an updated chart that shows all the price action since the lows of the last completed secondary reaction by the end of 2019 until today. The grey rectangles on the right side of the charts display the ongoing pullback.

 


 Sincerely,

One Dow Theorist