Wednesday, May 13, 2015

Dow Theory Update for May 13: Is the USD bull market over?

EUR under primary bull market as per the Dow Theory. US debt just about to signal primary bear market.

Following the suggestion of Algyros, reader of this Dow Theory blog, I have made it easier for its followers to know the current state of the trend (see banner above), as far as I am able to discern it. As you can see, the calmness continues. This is what has prompted Dave Moening of the “” to write:

“One of the biggest challenges in attempting to provide daily commentary on the markets is to somehow avoid saying the same darn thing day in and day out. However, at this stage of the game it is sooo tempting to simply type, “see yesterday’s comments, and the day before that, and the day before that!”

By the way, I like the straightforward analysis of Dave.

I agree with him. This is why I am taking advantage of the lull to convey vital insights about the Dow Theory instead of babbling every day. When there is no news, there is no news. Period.

Let's talk about Forex and US debt. Two charts have caught  my eye.

In spite of all the doom and gloom concerning the Eurozone, the charts tell me that a new primary bull market for the EUR (“FXE”) has been just signaled on April 28th, 2015.

In order to avail myself of the principle of confirmation pertaining to the Dow Theory, I use as second index the Swiss Franc ETF (“FXF”). The Swiss Franc is close enough to the Euro but different enough to be a good “dancing partner” so that we can apply the Dow Theory and be sure that there is confirmation.

Here you have the chart that says it all:

The EUR took some time to confirm the CHF, but finally we got a primary bull market signal for the EUR and CHF

While nothing is carved in stone, and this can be a failed signal (a roughly 30% probability), one thing is clear to me: The odds favor upside for the Euro and downside for the USD. How much? I don’t know. Rhea was clear that nobody can predict the extent and duration of primary movements, and since there is no "dow theory track record" for forex, I´d rather withhold judgment.

Furthermore, US debt is on the verge of signaling a primary bear market signal. As you can see in the chart below (TLT: ishares 20+ Yr Treasury Bond ETF; and IEF: ishares 7-10 Yr Treasury bond ETF). After a cyclical bull market that got started o 10/18/2013, we have just encountered a bearish secondary reaction, the subsequent rally (blue rectangles) and recently TLT violated its secondary reaction lows. IEF did not confirm, and, hence, it is too early to say that a primary bear market has been signaled. However, IEF is at a stone throw of reaching its secondary reaction lows.

US bonds flirting with a primary bear market signal. Last gasp of a bull market?

My assessment: If we couple a primary bull market in EUR (and by implication CHF), and the weakness of USD debt, we can safely assume that the odds for a lower USD are high. The last shoe to drop is IEF. A confirmed primary bear market in USD debt would lend credence to the primary bull market in EUR/CHF. Furthermore, it would explain the reluctance of the US Stock market to fall. Maybe the Chinese know something, since the Chinese stock market is also under a primary bull market. I don’t have time to show you charts of Chinese stocks, but believe me: What I see is an unambiguous primary bull market in China.

Please mind two things:

a) The Dow Theory can be applied to foreign stocks and to specific non stock markets (i.e. forex, gold, etc.)

b) The now dying primary bull market in US debt was signaled by this Dow Theory blog in 2013. Although its start was quite hesitant (since TLT violated the last recorded primary bear market lows but was not confirmed by IEF), it was a primary bull market signal after all, which has proven to be a very good one for those that had the courage not to outsmart the Dow Theory.  Here you have a chart displaying the primary bull market signal and the bull run than ensued.

A nice bull run since October 2013 seems to be running out of gas

Are the EUR and US Stocks bracing themselves for a lower USD? I don’t know; but I do know that the EUR is bullish and US debt is close to being very bearish.

Please mind that I don’t talk about gold and silver, since, technically, in spite of today’s bullish action (I am writing before the close), technically nothing has changed. One day wonders usually don’t change trends. Furthermore, if I am to believe Fofoa (which I do, since I also have my fundamental ideas, which I try to keep at bay when trading, since they may be flawed), GLD is going to be a poor predictor of USD weakness when the chickens come home to roost. Thus, GLD interests me only as a trading vehicle, but I don't consider it real gold.

The Dow Theorist

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