Thursday, March 5, 2020

Dow Theory Update for March 5: Setup for primary bear market signal completed on March 4th for US stocks

Gold and Silver were on the edge of a primary bear market signal


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 bearish (secondary reaction against the primary bull market), as explained here

Last Friday, February 28th, US stocks were close to meeting Schannep’s -16% bear market definition, which entails both the Industrials and the S&P 500 declining -16% or more from the last recorded primary bull market highs. The most recent rally (which started last Friday) has resulted in a setup for a primary bear market signal which lies above the -16% level.

Since Friday, February 28, date of the last recorded secondary reaction lows, both the Industrials and the S&P 500 have rallied for three days. Furthermore, the three indices have rallied more than 3% as shown in the blue rectangles on the charts below (we just need one index to rally 3% or more to meet the extent requirement for the setup). As per Schannep’s Dow Theory following the secondary reaction lows we need a rally that lasts at least two days (and my take is on a confirmed basis, at least two indices should go up) and with one index rallying 3% or more (not necessary confirmation, as explained here).

Here you have an updated chart. The red horizontal lines display the secondary reaction lows. If the S&P 500 and one more index jointly violate such levels a primary bear market would be signaled. 

If the red horizontal lines got broken by the S&P 500 and any other index, a primary bear market would be signaled

By the way, if you look at the charts, you’ll see the preceding secondary reaction very close to the current one (actually, the Transports' most recent reaction -middle chart- literally engulfed the previous one). Some traders might have decided that selling (or at least a partial sale) was in order when the lows of the previously completed secondary reaction were violated. By doing this one could have gotten out of harm’s way. Honoring the lows of the previous secondary reaction is not a fancy of mine, as was thoroughly analyzed in the following saga of five posts, which you can find here.

Furthermore, the lows of the previously completed secondary reaction is a subject that I plan to study in depth in the future with hard and fast data, as I feel it can help contain drawdowns, and, with luck, result in a modest increase of performance. I have already developed some preliminary rules to be applied when utilizing Schannep’s Dow Theory (basically, that not all the lows of the last completed secondary reaction are to be honored. Total distance from the top and the action of the Transports or Industrials define the action to be taken). But an in-depth test is to be performed. Another project in my pipeline.

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 Transports bettered on January 14, 2019 their secondary reaction closing highs (of 04/29/2019) hence confirming the Industrials. No three weeks of declining prices have been jointly made, and, thus, no secondary reaction yet.

However, we have to keep an eye on the lows of the last completed secondary reaction which were made on 05/31/2019. I have written profusely about them in the past.

The Transports already violated their 05/31/2019 closing lows on 02/27/2019. The Industrials have not confirmed. If their closing lows were broken out, one could infer that a primary bear market has been signaled. Please mind that the lows of the last completed secondary reaction as an alternative buy/sell signal is quite a contentious issue (albeit under the Classical Dow Theory, I tend to give it lots of credence as Rhea wrote about it, and for reasons I will explain in a future post) and hence some traders might decide to sell out at the breaking out of such lows whereas others might only make a partial sale, whereas others might wait until the more typical setup (secondary reaction lows, rally, decline and breakdown) occurs.

Readers of this blog know that I tend to favor multiple entries. By the same token I am not opposed to having several alternative exits. The goal is to smooth our equity curve, to reduce drawdowns. Thus, using the lows of the last completed secondary reaction serves as an alternative exit and as a tighter stop-loss when the new secondary reaction fails to materialize soon enough.

Here you have an updated chart.  

The lows of the last completed (orange rectangles left) secondary reaction may come to our help

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

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.

Here you have an updated chart:

In spite of most recent declines both the primary and secondary trend remains bullish


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.

Here you have an updated chart:

SIL violated the closing lows of the last secondary reaction, unconfirmed. Hence, no primary bear market signaled


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. I plan to write more in the future concerning how to integrate bonds in a Dow Theory based portfolio. Another project in my pipeline…and counting.

Here you have an updated chart:

Bonds tend to be a good hedge most of the time. Pain for stocks was gain for bonds

One Dow Theorist

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