Tuesday, December 17, 2019

Dow Theory Update for December 17: Recap for 2019

Primary Trends unchanged

It has been almost one month without updating about the trends for US stocks, precious metals, etc. My silence was due to the lack of change of trends, and to my having written several posts deepening vital concepts of the Dow Theory; one on capitulation whose saga I hope to complete by the end of Q1 2020 (currently I am penning the next chapter), and two posts (here and here) submitting evidence as to the applicability of the Dow Theory to any market, not just stocks, which opens the way for creating a Dow Theory based futures fund (this aspect, namely the construction of a Dow Theory portfolio that lends itself to be the cornerstone of an investment or even a futures fund, will take a good deal of my time next year).

This post is likely to be the last one of 2019, unless something happens that warrants a post. I feel 2019 has been a year rich in posts deepening the Dow Theory. I have dealt with many issues, namely:

·        Which stocks indices are best for applying the Dow Theory (http://www.dowtheoryinvestment.com/2019/10/dow-theory-special-issue-which-indices.html)

·        Which markets are better suited for the Dow Theory (http://www.dowtheoryinvestment.com/2019/06/dow-theory-special-issue-which-markets.html )

·        Important clarifications as to why monthly highs is not the relevant pivot the determine the change of trend (it is the secondary reaction, irrespective of its length) and the added value provided by confirmation (http://www.dowtheoryinvestment.com/2019/04/dow-theory-special-issue-why-it-is-bad.html and http://www.dowtheoryinvestment.com/2019/04/dow-theory-update-for-april-13rd-back.html  )

·        Clarifications as to why one must not wait until the last recorded all-time highs get bettered to declare a primary bull market with specific numbers concerning the performance lost when waiting so much

·        Clarifications as to how to determine a secondary reaction under the Rhea/Classical Dow Theory

 (http://www.dowtheoryinvestment.com/2019/02/dow-theory-update-for-february-4.html ) and how erroneous appraisal result in being “late”.

·        Isolating the two variables that account for the Dow Theory outperformance versus buy and hold (http://www.dowtheoryinvestment.com/2019/01/dow-theory-special-issue-two-variables.html ). 

All in all, there is plenty of stuff to read and mature for the reader really intent on mastering the Dow Theory.

Now let’s analyze the current state of trends. Please mind that I am writing before the close, so things might change.


Under Schannep’s Dow Theory

The primary and secondary trend turned bullish on October 25th, 2019, as was explained here and here. The Industrials and the S&P 500 continue making higher highs. As of this writing we are far from a secondary reaction. The Transports is failing to make higher highs (last one on 11/07/2019), but with just two indices the confirmation requirement is met.

Here you have an updated chart

Under the Rhea/Classical Dow Theory

If we appraise the trend under the “Rhea/classical” Dow Theory, the primary trend is bullish since April 1st, 2019, as was explained here

The secondary trend is bearish, as there is an ongoing secondary reaction against the primary bull market. The orange rectangles display the secondary reaction. On 06/20/2019 the Industrials bettered their secondary reaction closing highs unconfirmed by the Transports. On 08/27/2019 the Transports violated their secondary reaction closing low unconfirmed by the Industrials, and, hence, no primary bear market was signaled.

The Industrials has continued making higher highs and the Transports have been badly lagging behind unable to break up above their secondary reaction closing highs. The longer it takes for confirmation to occur, the more suspect the primary trend becomes. We should not forget that the failure to jointly better the secondary reaction highs entails that we cannot declare the secondary reaction as extinguished, and hence the secondary trend remains bearish.

Here you have an updated chart:


The primary trend and secondary trend was signaled as bearish on 11/07/2019 as was profusely explained here

 Off the hitherto last recorded primary bear market lows of 11/08/2019, SLV rallied for 16 trading days until the last recorded closing highs of 12/03/2019.

GLD made its last recorded primary bear market lows on 11/11/2019 and rallied for 15 trading days until 12/3/2019.

Hence, the time requirement for a secondary reaction has been met.

However, the extent requirement has not been fulfilled, as neither ETF has even managed to rally at least 3% (it should be more if we perform volatility adjustments), and the rally has not managed to retrace at least 1/3 of the bear swing which got started on 09/04/2019 (date of the primary bull market top). Hence, any way you cut it, the extent requirement is far from being fulfilled. This is why the current movement is displayed in the chart below with a green rectangle so that we don’t mistake it for a real secondary reaction (I display secondary reactions against primary bear markets in blue color).

I also explained that I’m doubtful as to whether this particular primary bear market will have long legs, as the trend, when appraised using weekly bars (longer time frame) is bullish. The resistance of the gold and silver miners ETFs to signal a primary bear market seems to confirm my qualms. Given that the precious metals miners tend to be leading SLV and GLD, the resistance of SIL and GDX to signal a primary bear market is more headwind against the current primary bear market signal.

Here you have an updated chart:

The small rally starting from the primary bear market lows does not qualify as a secondary reaction

The primary trend is bullish since 12/18/2018 as explained here. No changes. By the way, tomorrow we will be lighting a candle for the 1st anniversary of the primary bull market signal. A trade whose duration seems quite in line with what is to be expected under the Dow Theory.

On 09/04/2019 SIL and GDX made its last recorded primary bull market closing highs. From that date both ETFs declined and the secondary trend turned bearish  (secondary reaction against the primary bull market) as explained in-depth here.

On 10/25/2019 the setup for a primary bear market has been completed as explained here

Here you have an updated chart


As I was explained here, TLT and IEF (two ETFs that relate to US interest rates) are in a bull market (since 12/18/2018 or 11/19/2018 depending on the way one appraises the secondary reaction). I also explained that they are currently under a secondary reaction.

If you look carefully at the charts below you will see two different kind of rectangles superimposed. The orange and larger ones display the secondary reaction. The green and shorter ones display the first pullback which did not manage to fulfill the time requirement, and hence did not reach the status of a secondary reaction. This is why I highlight them but don’t “code” them with the color given the bearish secondary reactions (orange).

Off the 11/08/2019 closing lows (secondary reaction lows) both ITFs rallied for several days. TLT rallied +4.61% (blue rectangle) which amply exceeds the volatility adjusted requirement for a minimum movement (which stands at 2.87%). Since it is only necessary that one index fulfills the minimum movement for the rally that follows the lows of the secondary reaction, we can declare that the setup for a primary bear market has been completed.

However, “setup” is not the actual signal. Both ETFs have to violate their secondary reaction closing lows (red horizontal lines) for a primary bear market to be declared.

Here you have an updated chart.

I wish you all a very merry Christmas and a happy new year.
The Dow Theorist

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