Thursday, February 27, 2020

Dow Theory Update for February 27: In spite of all the turmoil, no primary bear market has been signaled.

Primary and secondary trends unchanged for US stocks, precious metals, and their ETFs miners and US interest rates.




Well, world stock markets are falling in earnest. However, in spite of all the turmoil, no primary bear market has been signaled for US stocks. According to Schannep’s Dow Theory we still need a rally of at least 3% confirmed by two indices and a subsequent pullback which violates the still to be established secondary reaction closing lows. So the “normal” primary bear market signal is not discernible yet.

However, if both the Industrials and the Transports jointly declined more than -16% (from the last primary bull market closing highs) a so-called bear market definition would have been met (for me those bear markets are akin to cyclical bear markets which tend to last more than  primary bear markets). More about the -16% bear market definition and the subsequent decline that normally follows such signals on Schannep’s website.


Hopefully, I can post more tomorrow or on Saturday, as I discern on the charts other alternative primary bear market signals. But we are not there yet.

I get the feeling that we are nearing panic levels which should warrant some kind of bounce (even if it is a dead cat one). One month ago, I was seeing clouds and now we got the storm (even more than I anticipated to be honest). Now, from a strict technical basis, I feel that US stocks should stage some kind of rally and get some kind of respite. I say this because of three reasons:

a)     Capitulation, yes, the famous capitulation indicator which tends to accurately signal market bottoms, could be reached if the NYSE Composite and the S&P 500 get 10% below their respectives 50 days moving averages. As of this writing, the Industrials are already 10% below their 50 days moving average. The NYSE and S&P 500 are close (at. ca. 9%) but not there yet. A final quick decline would result in capitulation.

Here you have the link to my last post on the capitulation indicator:


b)     The gold and silver miners ETFs which hitherto had withstood the selling pressure with modest declines today fell sharply. To me this sound that distressed selling given that the precious metals, especially gold are strong. Here you have an updated chart:

Climatic action in both SIL and GDX


c)     US interest rates ETFs (TLT and IEF) are going up almost parabolic, which seems also indicative of some climatic action. Here you have an updated chart:

The blue ellipse display the almost parabolic action of TLT

 
All in all, I keep my head cool. Bad things happen sometimes, but the investor who cannot digest a -10 or even -30% short term drawdown does not really belong in the stock market. As simple as that. However, since drawdowns are painful for most (and even for those with a thick skin), my main focus is to achieve drawdown reduction through various means (multiple signals, multiple markets, multiple strategies even if all have a Dow Theory common denominator)

Furthermore, I must say I am kind of happy with the current decline. Why? Because it is like the storm that cleans the atmosphere. A good decline, even a good bear market, would set the basis for the next strong bull market. What better time to buy than March 2009 or November 1987?. Moreover, I have  been planning a new Schannep’s based investing strategy (relative strength-based sector rotation with an absolute trend filter based on Schannep’s Dow Theory which oscillates between stocks and bonds) and I was waiting for the next big decline in order to start (I was not going to start do it close to a market top with the Transports diverging, just common sense!). So my waiting might come soon to an end.

I’d like to close this hastened and somewhat chaotic post with an important thought: Please mind the importance of the Transports. Many deride the inclusion of the Transports to the Dow Theory as a relic of the past. However, the Transports still play an important role under the Dow Theory. Please mind that important declines have always been preceded by a non confirmation or outright divergence of the Transports. Those readers that have been reading me for the last 5 weeks or so know that I was uneasy by the Transports lack of confirmation. Schannep himself escaped unscathed in the past several false signals due to the Transports lack of confirmation (2007 for instance comes to my mind ). The day I find time, I will carry out a compilation of all the occasions Schannep took the right decision by paying attention to the diverging or non confirming Transports. 

By the way, I didn't have time to take a look at Chinese stocks ETFs. I'll try to take a Dow Theory look at them and briefly report. Until then, stay tuned.

Well that was all for today.

Sincerely,
One Dow Theorist

Tuesday, February 25, 2020

Dow Theory Update for February 25: Secondary trends have changed for US Stocks, Gold and Silver Miners ETFs and US interest rates

Primary and secondary trend for gold and silver unchanged



Well, yesterday, February 24, was a day full in Dow Theory relevant events. Let’s get started. Last week I wrote that  I wanted to pen a post concerning the last primary bull market in gold and silver. Such a post will have to wait as I prioritize current market action.

US STOCKS

Under Schannep’s Dow Theory

The primary trend, signaled on 10/25/2019, remains bullish as was explained here and here.

The secondary trend turned bearish yesterday (February 24th, 2020). So now we have a secondary reaction against the primary bull market.

Let’s look at the entrails of this secondary reaction as it is a bit tricky.

The last recorded (primary bull market highs) for the Industrials were made on 2/12/2020. Hence the Industrials have declined for  7 trading days. The S&P 500 made its last recorded highs on 2/19/2020. Hence the S&P 500 has declined for 3 trading days. The Transports, our sempiternal (everlasting) laggard, made its last primary bull market highs on 01/16/2020, and, hence it has been declining for 24 trading days. Two observations: Please mind that last Monday,  February 17 there was no trading as it was NYSE holiday. All references made to “highs” mean “closing highs” as you know that a tenet of the Dow Theory is that we just take into account the close. Intraday action is misleading.

Under Schannep’s Dow Theory for the time requirement to be met, we need an average of all three indices of at least 8 trading days  which has been amply met. Here you have the math:

 (7+24+3)/3 = 11.33 days.

Furthermore, Schannep demands that at least two indices must have declined for a minimum of 10 calendar (not trading, just normal) days. This requirement has been met as well. Both the Transports and the Industrials have declined much more than 10 calendar days.

All in all, the time requirement for a secondary reaction to be declared has been fulfilled.

And what about the extent requirement? It has also been met on a confirmed basis (it takes at least two indices to decline at least 3%), as shown on the spread sheet below:



All in all, US stocks are now under a secondary (bearish) reaction. 

Please mind that both Schannep (with a wealth of price objectives having been met as he explained in his last newsletter to subscribers appropriately named “In the Target Zone”) and I (more modestly) based on the behaviour observed in my own short term trading have been warning that at least some correction was at hand. The odd behaviour I was seeing in my trading doesn’t always imply a change of primary trend, but it has always been a harbinger of a secondary reaction in the past, as we are seeing now. You can read my warning made on January 24th, 2020, here.


Here you have an updated chart. The orange rectangles on the far right (no pun intended) of the charts display the current secondary reaction. Next to the current secondary reaction we see the orange rectangles of the preceding secondary reaction. Two secondary reactions is such a short time attest to the underlying weakness of the market. If you look at the middle chart (Transports) you will see that the current secondary reaction engulfs the preceding one, as you can see a larger orange rectangle with a smaller one within. This is due to the fact that the Transports, unlike the Industrials and the S&P 500 were unable to better their primary bull market highs in February. 


Here we go again. New secondary reaction declared on February 24th, 2020
 
Under the classical/Rhea 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 bullish, as the Transport bettered on January 14, 2019 their secondary reaction closing highs (of 04/29/2019) hence confirming the Industrials. Hence, no secondary reaction yet.

GOLD AND SILVER

The primary and secondary trend were signaled as bullish on 02/19/2020, as explained here

By the way just three trading days have elapsed since the signal was given and there has been a nice run up. The moral is clear: Honor the Dow Theory signal as soon as it is given. Don’t expect that by delaying your entry (or exit) you are going to get a better price. I plan to write in the future about the impact on performance by delaying the entry/exit. Another project in my pipeline.


Here you have an updated chart:


 
GOLD AND SILVER MINERS ETFs


The primary trend is bullish since 12/18/2018 as explained here. On 02/24/2020 the primary bull market has been reconfirmed, as both SIL and GDX have bettered their last recorded primary bull market highs.

On 09/04/2019 SIL and GDX made its last confirmed 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 12/12/2019 SIL bettered its primary bull market closing highs unconfirmed by GDX. Finally, on 02/24/2020 GDX bettered its 09/04/2019 primary bull market closing highs, and hence the primary bull market has been reconfirmed. We can now declare the secondary reaction as finished, and hence the secondary reaction is also bullish now.

Here you have an updated chart. The blue horizontal lines depict the 09/04/2019 last recorded primary bull market highs (relevant levels to be jointly broken in order to declare the secondary reaction as extinguished). The blue round arrows highlight the specific day each ETF broke up above its respective primary bull market high.

 
By the way, this is the secondary reaction that is successfully overcome (I mean that does not end up in being a primary bear market), and hence this primary bull market is becoming a text-book example as far as the duration of the primary bull market and number of secondary reactions is concerned. Will it survive the next secondary reaction? We will see…


US INTEREST RATES


Depending on the way one appraises the secondary reaction that led to the setup that resulted in the primary bull market signal, the primary bull market was signalled either on 11/19/2018 or 12/18/2018. Rhea wrote that the definition of secondary reaction is not carved in stone. The signal of 11/19/2018 was obtained by being satisfied with just 14 trading days for TLT and 15 days for IEF. 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. It’s up to each investor to decide what to do (i.e. to commit to each signal 50% of one’s equity or go fully invested with just one signal).

On 11/08/2019 as secondary reaction was signaled, as explained here.


On 02/21/2020 TLT bettered its last recorded primary bull market highs of 08/28/2019. On that date IEF equalled (but did not better) its last recorded primary bull market highs of 09/04/2019, and hence there was no confirmation. On 02/24/2020 IEF did better its primary bull market highs and, therefore, we can declare the secondary reaction as ended, and the primary bull market as reconfirmed.

All in all, the primary bull market is now more than one year old.

Here you have an updated chart depicting the last primary bull market highs, the secondary reaction that follow and the final breakout.



Sincerely,
One Dow Theorist


Wednesday, February 19, 2020

Dow Theory Update for February 19: Primary bull market for SLV and GLD signaled today


Precious metals miners ETFs and US interest rates remain in secondary reaction against their primary bull markets


US STOCKS

Under Schannep’s Dow Theory

The primary trend, signaled on 10/25/2019, remains bullish as was explained here and here.

The secondary trend is also bullish, as was explained here.

However, to be “in the clear” we need confirmation from the Transports. I am personally bothered by the persistent weakness of the Transports which have not been able to better their all-time closing highs of 09/14/2018, and, more recently, their last recorded primary bull market closing highs of 1/17/2020 .


Here you have an updated chart:

 

Under the classical/Rhea 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 bullish, as the Transport bettered on January 14, 2019 their secondary reaction closing highs (of 04/29/2019) hence confirming the Industrials.

Here you have an updated chart which shows the price action under the “Rhea/classical” Dow Theory since April 2019 to date:



GOLD AND SILVER

On 1/24/2020 GLD bettered its secondary reaction closing highs. Today, 02/19/2019 SLV confirmed, and hence a primary bull market has been signaled. Now both the primary and secondary trend are bullish.

Hence, the primary bear market which was signaled on 11/07/2019 has had short legs. More about the primary bear market signal and my initial skepticism about that “health” of the primary bear market here.


My skepticism was based upon the secular trend for SLV and GLD which was and remains bullish. As per some preliminary tests I have carried out, trades taken against the secular trend (which is determined as well by the Dow Theory applied to weekly bars) have lower odds of success. I plan one day (after other projects on my Dow Theory pipeline have been completed) to post some research concerning the importance of the secular trend (outside of the realm of US stocks) and its application to trading with the Dow Theory based on daily bars.

Here you have an updated chart depicting the whole of the primary bear market, the secondary reaction, the pullback and the subsequent breakout which resulted in our primary bull market signal.

Primary bull market signaled on February 19th, 2020 (blue arrows)
 
I don’t have much time to blog, as I must catch a plane tomorrow and I have a quite heavy schedule for the next few days. I’ll try to post some figures concerning this last signal next week.

GOLD AND SILVER MINERS ETFs


The primary trend is bullish since 12/18/2018 as explained here. No changes. 

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

On 12/12/2019 SIL bettered its primary bull market closing highs unconfirmed by GDX. Hence, the secondary (bearish) reaction remains in force.

Here you have an updated chart:

In spite of a nice rally, the primary bull market highs have not been bettered. Sec Reaction still in force


US INTEREST RATES

While US interest rates is not the main focus of this blog, it should be so if I had more time. I have written in the past that interest rates are even better suited to the Dow Theory (or trend following in general) than even US stock indices. I’d further add that given that US interest rates tend to fluctuate slowly, the daily volatility of interest rates ETFs (especially for those in the short term spectrum) tends to be substantially lower than that of US stock indices. It is my contention (derived from my short term trading) that the lower the volatility, the less likely is to experience whipsaws (and hence the more profitable will be trend following versus fading the trend). Thus, interest rates are less prone to reversals which, in more volatile markets, can lead to false Dow Theory signals. Of course, the relationship between volatility and the Dow Theory is a subject to be dealt with in a future post of this Dow Theory blog.


Well, TLT and IEF have had a beautiful bull run. Depending on the way I appraised the secondary reaction leading to the setup for the primary bull signal, the bull market was signaled either on 11/19/2018 or 12/18/2018. From those dates there has been a bull run that wasn’t even interrupted by a secondary reaction.

However, on 11/08/2019, I felt that one could conclude that a secondary reaction has been signaled. The time requirement has been amply met. We have had more than two months of declining prices. As to the extent requirement, TLT has retraced ca. 36% of the bull market swing that started at the primary bear market lows of 11/02/2018.

IEF has roughly retraced 27.5% of the bull market swing that started at the primary bear market lows of 10/05/2018. So IEF has not managed to retrace the famous 1/3 alluded to by Robert Rhea. However, as even Rhea himself suggested (page 61 of his book “The Dow Theory”, Fraser Edition 1993) the definition of secondary reaction is not carved in stone. Furthermore, as I wrote here, I feel that the more “time” we have, the less “strict” (but be cautious!) we can be with the extent requirement.


In this specific instance, we have had more than 2 months of declining prices which greatly exceeds 3 weeks. Furthermore, we have had almost a year (since the signaling of the primary bull market) without a secondary reaction (which is not normal, as bull market swings get often interrupted by secondary reactions). Hence, when I consider all factors, I consider that the current decline may be qualified as a secondary reaction. One option for the actual trader of IEF and TLT could be to split its capital. One half considering that a secondary reaction has been signaled (which might lead to a primary bear market signal in the future) and one half as if nothing has been signaled (waiting for the 1/3 retracement on a confirmed basis). Readers of this blog also know that I am a firm believer in generating many trades in order to reduce drawdown duration. Hence, in doubtful cases, such as this secondary reaction, there would be nothing wrong with trading ½ of capital in different ways. One half assuming that there is right now a secondary reaction (which might be followed by a bear signal); the other half waiting for more declines in IEF so that the 1/3 retracement requirement is also fulfilled.

Here you have an updated chart. The orange rectangles on the right side of the chart display the current secondary reaction. The darker orange rectangles within the lighter and larger rectangles depict the first decline that did not manage to fulfill the time requirement for a secondary reaction.



As you can see from the charts, neither IEF nor TLT have bettered their last recorded primary bull market closing highs, and hence the secondary reaction within a primary bull market remains fully in force.

Finally, here you have a chart depicting the whole primary bull market since it got started by the end of 2018

A nice primary bull market run which has been interrupted by a secondary reaction (which is normal)
 

Sincerely,
One Dow Theorist