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 1^st, 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