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.


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.


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:


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…


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.

One Dow Theorist

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