Trends unchanged for all the markets I cover
US STOCKS
Under Schannep’s Dow Theory
The primary trend is
bearish since March 9th (penetration of the lows of the current
secondary reaction) or even February 25th (alternative exit based on
the penetration of the lows of the previously completed secondary
reaction), as explained here.
Of course, the
secondary trend is also bearish. However, since on March 9th, 2020
we had capitulation, this means that the time requirement for the appraisal of
a secondary reaction gets shortened to just one week. Schannep in his letter to
Subscribers of November 1st, 2008 provides a good explanation as to
the shortening of the time requirement following capitulation.
Off the 03/23/2020 bottom,
the three indices we monitor have rallied for 3 trading days. Hence the time requirement has not been
fulfilled, and no talk of secondary reaction.
As to the extent
requirement, the three indices have staged powerful rallies with clearly exceed
the minimum 3% on at least two indices. The spreadsheet below displays the powerful
rally.
By the way, you’ll notice
that the Industrials have rallied more than 19% off the hitherto established
bear market lows. The S&P 500, though, has failed to do so. Thus, we have
not reached the definition of a bull market (a cyclical one, higher order than
those appraised under the typical signals). Once the S&P 500 joins the
parade and rallies +19% , a bull market definition will be met. More about
Schannep’s bull and bear market definitions and the powerful implications of
such signals here and here. By “powerful” I mean that the average “bull market”
as defined by a confirmed +19% rally has very long legs. The average bull
market averaged 109.6% (from top to bottom) and lasted 34.1 months. So this is
no small potatoes.
Furthermore, we should
recall that the capitulation indicator tends to accurately signal the end of
bear markets and predicts powerful rallies. Out of 17 signals since 1962, 16
showed profit 6 months after the day of the signal. Only the one of October 7th,
2008, showed a loss six months after the signal but a gain of +6.6% after one
year. The takeaway is clear: Capitulation
is a powerful indicator and identifies deeply long term oversold conditions
where a strong rebound is likely. Here you have the complete record of the
capitulation indicator showing the subsequent gains 6 months, 1 year, 3 years
and 5 years after the signal.
Thus, in spite of all the pessimism
that surrounds us, if the S&P 500 manages to rally +19% off the 03/23/2020
closing lows, we would have a technically
promising picture, as we’d have two simultaneous “up” waves:
a)
A bull market signal which
in itself is harbinger of strong and long rallies.
b) A bull market signal given
within the context of severely long term oversold conditions (compressed spring
further providing tailwind to the new bull market)
Therefore, the action of
the S&P 500 is vital. It is the index to watch.
Under the Rhea/Classical
Dow Theory
The primary and secondary
trend turned bearish on March 9th (once again: the lows of the last
completed secondary reaction violated) as explained here.
As a reminder, the classical Dow Theory does not use either “capitulation” or “bull
market definition of +19%”. Hence, we have to wait for a change of trend until:
a)
Either a secondary reaction
develops, followed by a pullback and subsequent breakup.
b)
Or, if no secondary reaction
develops, until the last primary bull market highs are broken up (which would
be a horrendous and very unlikely entry).
GOLD AND SILVER
Following a sharp decline SLV
penetrated its last recorded primary bear market lows on 3/12/2020. GLD
declined but on a much more muted basis and did not confirm. Hence, no primary
bear market signal. Rhea (page 77 of his book, Fraser Edition 1993) recognized
as a valid exist point the closing lows of the last primary bear market (red
horizontal lines on the charts below). GLD remains 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.
GLD has declined for just 9 trading days. SLV
(from last highs to bottom) for 17 trading day. Hence, the decline does not
meet the time requirement for a
secondary reaction. Since we just have
two indices, I’m inclined to go quite “classical” as far as the time
requirement is concerned (requiring 3 confirmed weeks). Furthermore, the
rules of Schannep’s Dow Theory presuppose the existence of three indices. If I
had more time (another project for my pipeline), it’d be interesting so include
a third index (let’s say GDX) and apply to them the tenets of Schannep’s Dow
Theory (i.e. less days in order to declare a secondary reaction). Would we get
better results? I’m inclined to say “yes” provided the third index is
correlated enough to the other two. This is another further area of research.
From burning my eyes looking at charts using Schannep’s Dow Theory applied to
US stock indices, I know that we derive more “signal” by using three than by
using two. And this is why, in spite of requiring less time for a secondary
reaction (the less time, the more noise and erratic movement) Schannep’s Dow Theory is more efficient (better profit factor) than the “classical” Dow
Theory. If the inclusion of a third index wouldn’t add value (“signal”),
trading with shorter secondary reactions should result in a worse profit factor.
And this is not the case. Hence, I feel that, provided we find the right kind of
“triplets” (which is not an easy feat) the tenets of Schannep’s Dow Theory
could be in all likelihood successfully applied to other markets. If some
futures trader is reading this post, it’d be interesting to see what’d happen
if we’d used three different contract months futures and applied to them
Schannep’s Dow Theory.
Here you have an updated
chart:
GOLD AND SILVER MINERS ETFs
The primary trend was
signaled as bearish on March 11th, 2020, as explained here.
Following the turmoil which
afflicted markets last week, SIL violated on 02/28/2020 the lows of the last
completed secondary reaction, which also constitute a valid exit signal
(especially under the Classical Dow Theory), unconfirmed by GDX. On March 11th,
2020 GDX confirmed, and, thus, we got a primary bear market signal.
On 03/13/2020 both ETFs
made their hitherto last primary bear market lows. From that date they have
rallied (from bottom to last top) for 8 trading years, which falls short from 3
confirmed weeks. So no secondary reaction in sight, yet.
Here you have an updated
chart:
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 equaled (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 went parabolic reflecting the current chaos which is
plaguing all markets. From the 03/09/2020 closing highs both ETFs declined
until a bottom was made on 3/18/2020. Hence, there was been just 7 days of
decline, and, thus, the time requirement for a secondary reaction against the
strongly bullish trend has not been met.
All
in all: both the primary and secondary trend remains bullish.
Here
you have an updated chart:
Sincerely,
One
Dow Theorist
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