Gold and Silver were on the edge of a primary bear market signal
US STOCKS
Under Schannep’s Dow Theory
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.
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| 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 |
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.
Here you have an updated chart:
 |
| In spite of most recent declines both the primary and secondary trend remains bullish |
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.
Here you have an updated chart:
 |
| SIL violated the closing lows of the last secondary reaction, unconfirmed. Hence, no primary bear market signaled |
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. 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:
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| Bonds tend to be a good hedge most of the time. Pain for stocks was gain for bonds |
Sincerely,
One Dow Theorist
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