I am writing before the close. So readers beware.
US STOCKS
Under Schannep’s Dow Theory
As I explained here, US stocks completed the setup for
a primary bear market signal on March 4th.
On 03/05/2020 the Transports penetrated the March 3th
closing lows unconfirmed. Hence, no signal.
Yesterday, March 9th, the Industrials and
the S&P 500 have jointly violated their February 28th closing
lows. Given that the S&P 500 participated in the breaking down of the
February 28th lows and that both the Industrials and the Transports
confirmed (we needed just one confirmation), a primary bear market has been signaled.
At the same time, on March 9th the
so-called bear market definition
(-16% decline from the top on both the Industrials and the S&P 500) has been met, which entails what I’d
call a cyclical bear market. Those cyclical bear markets are “higher order”
bear markets than those determined by the typical setup (market top, secondary
reaction, rally and breakdown). Hence, cyclical bear markets tend to last
longer and decline more than primary bear markets. A more thorough information
about the relationship between secular, cyclical and primary bear markets here
More about what I call cyclical bear markets on
Schannep’s website
As per Schannep’s Dow Theory, a primary bear market
would entail the selling out of the whole long position. The same would have
applied if, absent a primary bear market signal, a cyclical bear market (-16%
decline confirmed by the S&P 500 and the Industrials) had occurred.
However, to complicate matters (or to give us a glimpse of hope), on this very day
(March 9th, 2020) we had capitulation
as well. I have profusely written about capitulation in the following posts:
As a reminder, I have been writing about capitulation
in the following posts.
Capitulation partially
negates the “sell” signals we have gotten by both the primary bear market and
cyclical bear market signals.
Hence, for those only following, Schannep’s Dow Theory (that is without
following Schannep’s “timing indicator”), it is advised to keep a long position
of 25% (in other words, to sell just 75%), as capitulation tends to accurately
signal a market bottom. Those following Schannep’s “timing indicator” too have
been advised by Schannep to keep a 50% position which implies selling the other
half. Please mind that this blog, rather than a subscription service with a
commitment to punctually transmit to subscribers actionable advice (such as
Schannep’s) is just a means to increasing our knowledge of the Dow Theory and,
hence, what I post in this Dow theory blog is not a substitute (and it is not
intended to be) for the real thing.
All in all, as per Schannep’s Dow Theory a 25%
position is to be kept. Furthermore, the
fact that we have had capitulation shortens the time requirement for the next
secondary reaction against the brand new primary bear market. Following
capitulation we just need one week.
Hence, things may change very quickly in the coming days. Once again, those
wanting to be informed in real time should go to Schannep’s website.
What I’m going to write now is not strictly Schannep’s
Dow Theory, albeit I feel it can be perfectly accommodated within it, as it is
sound Dow Theory. I devoted a saga of posts concerning the lows of the last completed secondary reaction as a valid exit
point. Hence, this is not something I am making up. If you read carefully those
posts, you’ll see that the current situation was anticipated and the “medicine”
suggested was taking into account those vital lows. Here you have the link to
the last post of this exhaustive saga which contains the links to the other
posts.
By “the last completed secondary reaction” I mean the
secondary reaction prior to the current one. To know that one reaction is the
“last one” we need to have had higher confirmed highs. Once we have higher
confirmed highs, we know that we “reset” the clock, declare the reaction as
ended and start looking for the next one.
In our specific instance, the closing lows of the last
completed secondary reaction were made on 01/31/2020. Armed with my saga of
posts concerning the lows of the last completed secondary reaction as an
acceptable (Rhea accepted it most of the time) and reasonable (is a clear pivot
point) exit point some traders may have decided to at least
partially reducing long exposure on 02/25/2020 when the S&P 500 and the
Industrials confirmed the Transports in penetrating those lows, as was explained
here. For my personal trading the breaking down of the 02/25 closing lows was a
warning sign, and prompted me to adapt my trading to an already bear market
(which implies, among other things, reducing leverage and that I avail myself
of any intraday rally to partially unload instead of waiting, as I normally do,
until the close). The reasons that made such lows a reasonable exit point were:
a)
The
Transports did not confirm the last primary bull market closing highs made by
the Industrials (02/12/2020) and the S&P 500 (2/19/2020). In this very blog
I uttered my uneasiness with the lack of confirmation.
b) In
his newsletter to subscribers of February 1st, 2020 Schannep warned
his readership about many price targets having been met and the likelihood of a
top having been made. In and on itself this was not enough to sell out at the top,
as we are trend followers and we don’t catch tops and bottoms. However, it was
a warning sign which may have implied tightening stops and being less tolerant
with declines. Schannep himself declared that we was going to lighten up some private
accounts.
c)
While
this is very personal, my own short term trading was telling me that the
internals of the market were weakening. I warned about on January 24th,2020.
I insist that having several alternative exits is a sensible course of action provided
the trader/investor has enough time to be on top of them. The same applies to
alternative entries. The whole of Schannep’s system (the Dow Theory plus the
“timing” indicator) provides us with alternative entries and exits, which is a
good thing not necessarily to increase performance but to smooth out the equity
curve (the smoother, the less drawdown, the better). The only issue of
alternative entries and exits is that of quality.
All of them should be profitable in the long run, contain drawdowns and have a
long, really long track record to avoid statistical flukes.
Here you have an updated chart. It begins on the left side with the “last
completed” secondary reaction (orange rectangles). The pink thick horizontal
lines depicts the relevant levels to be violated for an alternative sell signal
to be signaled. The next orange rectangles (middle right side of the chart)
depicts the current secondary reaction, the rally than followed which setup US
stocks for a primary bear market, and the subsequent penetration on March 9th of the 02/28
secondary reaction lows which resulted in the new primary bear market signal.
Study it carefully as there is a wealth of information therein.
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Two alternative exits: the lows of the current secondary reaction (red lines) and those of the previous one (pink lines) |
Under the Rhea/Classical Dow Theory
The primary bear market turned bearish on March 09th,
2020 when the Industrials finally confirmed the Transports (break down on
02/27/2020) in penetrating the lows of the last completed secondary reaction.
Once again we are availing ourselves of the alternative primary bear market signal. Please mind that when the
February 28th lows were made we could signal a secondary reaction as
the Industrials had not yet rallied for at least 3 weeks (the Transports did).
Absent confirmation no new secondary reaction could be signaled, and we only
had the “previous” one. As we see, the lows of the last completed secondary
reaction came in handy in order to give us an exit point. However, please note
the great difference in reactiveness between Schannep’s Dow Theory and the
Classical one. While we used the same “rule”, namely the lows of the last
completed secondary reaction, Schannep’s Dow Theory flashed danger (that is an
alternative sell signal) much earlier than the Classical.
Now both the primary and secondary trend are bearish.
Here you have an updated chart. I display the current decline with green rectangles instead of the usual orange because it is not yet a secondary reaction. Bearish reactions are displayed in orange and bullish ones in blue. When neither, in some other color such as green.
![]() |
Once again the lows of the last completed secondary reaction signal a primary bear market |
GOLD AND SILVER
In just four days SLV declined drastically. GLD
declined but on a much more muted basis. Hence, the decline does not meet the time requirement for a secondary
reaction.
However, Rhea recognized as a valid exist point the
closing lows of the last primary bull market (red horizontal lines on the
charts below). SLV did not break its primary bear market low by a hair. GLD was
always at a safe distance, and hence no primary bear market was signaled. More
about the alternative entry and exit signals under the Dow Theory here.
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.
The secondary trend is bullish as was explained here.
Please mind that, following the turmoil which afflicted
markets last week, SIL violated the lows of the last completed secondary
reaction, which as I have explained above in this post, also constitute a valid
exit signal (especially under the Classical Dow Theory). However, GDX did not
confirm and, thus, we didn’t get a primary bear market signal. The current
decline from the last primary bull market highs doesn’t fulfill the time
requirement on a confirmed basis (please mind that SIL made its highest closing
highs on 12/26/2019, and, thus it has declined for more than 3 weeks. However,
GDX hasn’t done so). All in all, it is too early for a secondary reaction to be
declared.
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 has ended, and the primary bull market as reconfirmed.
From the reconfirmation date of 02/24/2020 TLT and IEF have gone almost
parabolic.
The behavior of US interest rates during these days of
crisis reminds us that some bonds belong in many peoples portfolios provided
they are under a bullish trend under the Dow Theory.
Sincerely,
One Dow Theorist
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