Thursday, December 24, 2020

Dow Theory Update for December 24th: Secondary reaction against the primary bear market for SLV and GLD


 Secondary reaction for SIL and GDX too


GOLD AND SILVER

 

Introductory note: In this post, I wrote a thorough explanation concerning the rationale behind my use of two alternative definitions in order to appraise secondary reactions.

 

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

 

The primary trend was signaled as bearish on 11/27/200, as was explained here.

 

Off the hitherto 11/27 closing low, SLV rallied for 15 trading days, and GLD rallied for 13 trading days. So the time requirement when we allow for some flexibility (as Rhea did) for a secondary reaction was met.

 

As to the extent requirement, I performed some calculations, which you can see in the table below:


 

The minimum movement for US stock indexes is 3%. A movement less than that is not to be considered. When we are outside of the realm of US stocks, I think we have to consider the volatility of the asset in question and compare to that of the S&P 500. I calculated a 1000 days moving average of the daily percentage change for both the S&P 500 and GLD and SLV. A more in-depth explanation about volatility-adjusted calculations here.

  

The table below calculates the retracements. The bear market swing (downward) starts on 11/6/2020, the date of the last recorded secondary reaction highs, and ends on 11/27/2020 (hitherto bear market bottom). The rally got started on 11/27 and carried until 12/21 for SLV and 12/17 for GLD.

 


 

So as you can see, there is no doubt as to the existence of a retracement exceeding 1/3 of the previous bear swing.

 

Now take a look at the charts of SLV (top) and GLD (bottom):

 

 

The light blue horizontal lines display the highs of the last completed secondary reaction. Not those of the current one, but the previous one. The breakup of such highs (lows) is a valid Dow Theory signal, as I have profusely explained on this blog. As you can see, SLV did break topside its last recorded secondary reaction highs. However, GLD did not confirm. Absent confirmation, no primary bull market signal was given.

 

So, where do we stand now?

 

1. If GLD rallied and broke up above its 11/6/2020 secondary reaction closing highs (blue horizontal line, bottom chart), a primary bull market would be signaled.

 

2. However, if both SLV and GLD had a decline exceeding the minimum volatility-adjusted movement (see table above), then a setup for a primary bull market would be completed. In such an instance, the confirmed breakup of the 12/21 (SLV) and 12/17 (GLD) highs would signal a new primary bull market. However, as of this writing, the ongoing pullback lacks the time (for SLV) and the extent (both of them) to set up both precious metal for a primary bull market.

 

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

 

The primary trend was signaled as bearish on 11/27/2020, as was explained here.

 

Given that the rally starting off 11/27/2020 lows did not exceed 15 days on a confirmed basis, the time requirement has not been fulfilled. Absent the time requirement, I don’t even bother with the extent requirement.

 

However, SLV broke up above the last recorded secondary reaction highs of 11/6/2020 unconfirmed by GLD. Thus, no primary bull market signal was given.

 

The charts below display the current situation. The grey rectangles on the right side of the charts show the ongoing rally, which does not qualify as a secondary reaction yet. Hence the grey color, which I use it to denote neutrality (blue is bullish, red/orange is bearish). You can see that SLV (top chart) broke topside the blue horizontal line, which corresponds to the price level of the 11/6/2020 closing highs (highs of the last completed secondary reaction). 

 

 While I don’t have the time to give you full calculations, the blue rectangles do qualify as a secondary reaction even when we apply the Dow Theory according to the “mainstream” interpretation. The rally lasted 32 trading days, and it retraced almost  45% for SLV and 44% for GLD of the previous bear swing. So the minimum 1/3 requirement was also met. Accordingly, given that the blue rectangles constitute a secondary reaction, its confirmed breakup would entail a primary bull market signal.

 

I’d like to write about SIL and GDX, as I see a secondary reaction completed (when being under the “shorter” time-frame). You can find the last update for SIL  and GDX here. Hence, we should be on the lookout for a primary bull market setup if we had a stronger pullback. Since tomorrow I will not work, and thereafter comes the run-up to our monthly Letter to Subscribers at thedowtheory.com, it is quite unlikely that I will post until the first days of 2021.

 

So I wish you all a Merry Christmas and a great and hopefully virus-free 2021.

 

Sincerely,

Manuel Blay

(One Dow Theorist)

Friday, December 18, 2020

Dow Theory Update for December 18: Secondary trend for US bonds bearish when taking a longer time-frame

  

Primary trend unchanged for precious metals, their ETF miners, and US stocks.

 

Today we focus on US Bonds. I am writing before the close, so things might change. Readers beware.

 

Given that the primary trend has not changed for precious metals, their miners ETFs, and US stocks, please go to the following posts for the latest assessment of trends:

 

 

Gold and Silver miners ETFs

 

http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-24th.html

 

Gold and Silver

 

http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-28th.html


US stocks

http://www.dowtheoryinvestment.com/2020/12/dow-theory-update-for-december-8.html

 

US INTEREST RATES

General Remarks:

 

In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions in order to appraise secondary reactions.

 

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 bear market in bonds represents higher interest rates.

 

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

  

The primary trend was signaled as bearish on October 5th, 2020, as was explained in-depth here.

 

As of this writing, the secondary trend remains bearish, as no secondary reaction against the primary bear market can be discerned in the charts.

 

On 11/10/2020, TLT and IEF made their last recorded closing lows. From that date, a small rally set in which finished on 11/20/2020. Such a rally lasted 8 days, which is, in my opinion, not enough to declare a secondary reaction. And I say so because the extent of the rally has been quite mitigated. I could settle with a rally lasting just 8 confirmed days if its extent had been more remarkable or a significant closing high (such as the 10/14/2020 highs) had have been broken topside.

 

All in all, it is too early to declare the existence of a secondary reaction against the primary bear market.

 

However, what I see on the charts is the formation of a line (narrow range). Look at the spreadsheet below.

 


 

As you can see, the breadth of the line for TLT amounts to 4.09%. The breadth of the line for IEF amounts to 1.03%. While the line’s range is not carved in stone, when dealing with US stocks indexes, Rhea advocated for a maximum extent of 5% on a confirmed basis. Given that TLT and IEF have lower volatility than US stock indexes, we have to perform some calculations in order to account for the smaller volatility.

 

I performed the adjustment as follows.  I calculated the volatility-adjusted number comparing the standard 3% minimum movement for US stock indexes. More about this calculation here.

 

Hence, a 3% movement for US stocks indexes (i.e. S&P 500) corresponds to a 2.36% movement for TLT and 0.89% for IEF. So if we perform a rule of three, we obtain for a 5% movement in US stock indexes (the approximate maximum range), a corresponding figure of 3.93% for TLT, and 1.48% for IEF.

 

So IEF clearly fits the bill. TLT’s 4.09% range very slightly exceeds that of 3.93% (the theoretical maximum). However, given that the line has been in existence for 26 trading days (so this is slightly more than a full trading month), I feel we can safely accept 4.09% as a tight enough movement.

 

The charts below display the price action since the last recorded bull market highs to date.

 


 What are the practical implications of the line? Well, its upside penetration would imply that the secondary trend has turned bullish. So we’d have a secondary reaction against the primary bear market. Once we have a secondary reaction, we could get the setup for a primary bull market signal once prices receded without jointly breaking down the 11/10/2020 closing lows. A full explanation about lines under the “classical/Rhea” Dow Theory and how to derive buy and sell signals from them can be found here.

 

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 primary trend was signaled as bullish on 12/18/2018, as was explained here.

 

As you can see in the charts and in the spreadsheet below, there has been a long decline off the 8/4/2020 closing highs. As far as retracements are concerned, TLT retraced 44.76% of the previous bull market swing. On the other hand, IEF has only retraced 29.43% of the previous bull market swing. So, we still lag behind the “confirmed” 1/3 retracement. However, given that the pullback has lasted a good many days, I’d be inclined to consider that “extent” requirement has been met too. Furthermore, the fact that between 8/27/2020 and 10/2/2020, there was a line that was broken down on 10/5/2020 seems to confirm the change of the secondary trend from bullish to bearish even under a strict interpretation of the Dow Theory. All in all, one can safely conclude that on 11/10/2020 (right side of the orange rectangle) a secondary reaction was signaled. Off the 11/10/2020 lows,  a rally ensued which finished on 11/20/2020. This rally has two consequences:

 


 

 a) It resulted in a line (as more days passed within the range made in the first 8 trading days). If it were jointly broken up, I’d interpret it, as a change of the secondary trend from bearish to, once again, bullish.

 

b) It set up TLT and IEF for a primary bear market signal.

 

Sincerely,

 

 

Manuel Blay

(One Dow Theorist)

 

 

 

 

 

 

 

 

 

 

 

Tuesday, December 8, 2020

Dow Theory Update for December 8: Secondary reaction successfully terminated and primary bull market reconfirmed

Trends unchanged for precious metals, their miners ETFs and US interest rates

 

Today we focus on US stock indexes.

 

Given that neither the primary nor the secondary trend has changed for precious metals, their miners ETFs and US interest rates, please go to the following posts for the latest assessment of trends:

 

US BONDS:

http://www.dowtheoryinvestment.com/2020/10/dow-theory-update-for-october-6th.html

 

Gold and Silver miners ETFs

 

http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-24th.html


Gold and Silver


http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-28th.html


US STOCKS

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

 


On 12/02/2020, 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 and why it was served on a silver platter, is available in our June 1st, and November 1st 2020 Letters to Subscribers of thedowtheory.com. Since many followers of this blog have become Subscribers, please read both Letters carefully. For those still sitting on the sidelines, I encourage you to become Subscribers, as you are missing a great piece of the action and ongoing research and Jack Schannep’s own market wisdom. Many things are going on in our monthly Letter and, importantly, Subscribers are alerted in real-time of any impending Buy or Sell signal.

 

The S&P 500 and the Industrials made their last recorded highs on September 2nd. The Transports did so on September 16th. From such highs, all indices declined until September 23rd. Since the decline amply exceeded 3% on a confirmed basis, so the extent requirement for a secondary reaction was met. The pullback for the three indices averaged 11 trading days, which satisfied the time requirement. So the secondary trend turned bearish (secondary reaction against the primary bull market).

 

The Transports broke topside on 10/07/2020, its last recorded primary bull market highs (9/16/2020) unconfirmed. Thereafter, the Industrials and Transports broke down below their 9/23/2020 secondary reaction lows unconfirmed, as the S&P 500 refused to pierce its 9/23 closing low. Pease mind that under Schannep’s Dow Theory, the S&P 500 must confirm for a signal to exist, as was explained here.

 

So we were in no man’s land: Topside and downside breakouts unconfirmed.

 

On 11/9/2020 the Industrials broke topside its September 2nd closing highs. The S&P 500 finally did so on 11/13/2020 and, hence, the secondary reaction was successfully ended and the primary bull market reconfirmed.

 

Here you have a chart displaying the price action until December 2nd.

 


“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.

 

Some months ago I 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.

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. Under a flexible interpretation of the Dow Theory, and given that since the last recorded confirmed highs 41 trading days have also elapsed for the Transports), I’d be inclined to say that the time requirement could have been met provided the extent of the decline makes up for the lack of time. 

 

Thus, I’m willing to be accommodative as far as the decline has been sizeable. In other words, the more “decline” the less stringent I am with the “time” element. However, the Dow Transports has not remotely retraced 1/3 of the previous bull swing (which started at the lows of 3/23/2020, as no secondary reaction has been signaled to date). The Industrials haven’t retraced 1/3 of the previous swing either. Thus, given that the extent requirement has not been met, I’d need more days of declining prices in order to consider the time requirement as fulfilled.

 

All in al, even under a “Rhea-like” interpretation of the Dow Theory, I feel that neither the time nor the extent requirement has been met, and hence we cannot talk of a secondary reaction.

 

Following the pullback that did not qualify as a secondary reaction, the Industrials broke topside their 9/2/2020 closing highs on 11/9/2020. The Transports broke up above their 10/15/2020 closing highs on 11/10/2020. So confirmed higher highs means that the primary bull market has been reconfirmed.

 

Here you have an updated chart. The grey rectangles display declines that do not qualify as a secondary reaction and the final breakup. 

 


 

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.

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. So the time requirement has not been met (the Transports is far from 3 weeks). Absent the time requirement, I don’t even bother with the extent requirement.

 

Following the pullback that did not qualify as a secondary reaction, the Industrials broke topside their 9/2/2020 closing highs on 11/9/2020. The Transports broke up above their 10/15/2020 closing highs on 11/10/2020. So confirmed higher highs means that the primary bull market has been reconfirmed. 

 Here you have an updated chart. Grey rectangles imply a pullback that does not qualify as a secondary reaction.

 


 Sincerely,

Manuel Blay