Saturday, May 16, 2020

Dow Theory Update for May 15th: Bullishness in Precious Metals

Any way we measure secondary reactions both precious metals and their miners ETFs are in a primary bull market


Schannep’s Dow Theory (more properly: The Dow Theory for the 21st Century)

At 05/12/2020, the primary and secondary trend was bullish since April 6th, 2020 (bull market definition), as was explained in-depth here

“Rhea’s /classical" Dow Theory

Readers of this blog know that I am making a habit of not being wedded to just one definition of a secondary reaction when the charts scream at me that there may be an alternative one. Sometimes charts will tell us that only one definition makes sense. On other occasions, we may get two alternative definitions, both being technically sound.

I feel that in our specific juncture, it made full sense to declare the existence of a secondary reaction with just a rally of 13 trading days for the Transports and 18 days for the Industrials. Please read this link carefully in order to know the 7 reasons that advocate for accepting a secondary reaction in spite of just 13 days rally for the Transports.

The Industrials made its secondary reaction highs on 4/17/2020, from that date it declined for two trading days. The Transports made its secondary reaction highs on 4/09/2020, and from that date it declined for eight trading days. Both indexes declined more than 3%, and hence the setup for a primary bull market was completed.

On 4/27/2020 the Transports bettered its 4/09/2020 secondary reaction highs. The Industrials did so on 04/29/2020, and hence on 4/29/2020, a primary bull market was signaled.

As of this writing, I see no secondary (bearish) reaction against the primary bull market.

Here you have the charts displaying the price action since the 03/23/2020 bear market lows to date.

However, if we strictly demanded, like purists do (please mind that Rhea was not a purist) a confirmed rally of at least 3 weeks, then we would have to wait until April 29th, 2020 to declare the existence of a secondary reaction. From that date, the Industrials declined -3.8% and the Transports -10.05%, so the setup for a primary bull market has been completed. So now for purists, we have the following alternatives:

a)     Either the April 29th, 2020 closing highs get jointly broken up in which case a primary bull market would have been signaled.

b)     Or the primary bear market lows of 3/23/2020 are jointly violated in which case the primary bear market would be reconfirmed. Please mind that under the strict definition of a secondary reaction, we are still under a primary bear market.

Here you have the updated charts:

Readers can see that by using two legitimate secondary reactions, we can derive two alternative entry levels, which is a good way to split one’s capital. If one lacks the conviction to bet the whole farm on a given signal, it may not be a bad idea to cut the available trading capital into two halves. At the risk of insisting too much on this aspect: The more “good quality” trades (that is trades derived from a sensibly appraised secondary reaction) we have, the more likely our drawdowns will be reduced in time and depth.


The primary was signaled as bullish on 02/19/2020, as explained here.

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 exit point the closing lows of the last primary bear market (red horizontal lines on the charts below).

One could consider the decline as a secondary reaction. An in-depth explanation about it here.

On 4/9/2020 GLD bettered its last recorded primary bull market highs unconfirmed by SLV, so the primary bull market has not yet been reconfirmed. Thus, the secondary trend remains bearish.

Here you have an updated chart:


One legitimate interpretation of the Dow Theory would let us conclude that the primary trend turned bullish on April 9th, 2020 as explained here.

For those wishing to adhere to a more strict interpretation of a secondary reaction, the primary trend would have remained bearish (bearish signal given on March 11th, 2020) until 05/15/2020, as explained here. On 05/15/2020 SIL finally broke up its last recorded primary bull market closing highs of 12/26/2019. GDX had done so on 4/22/2020. Thus, even under the most restrictive interpretation of the Dow Theory, the primary trend was signaled as bullish on 05/15/2020.

The recent price action of SIL and GDX epitomizes the need for being flexible (and “sensible”) when appraising secondary reactions (which lead to the final buy or sell signal). In this specific instance, following the bear market lows 3/13/2020 SIL and GDX staged such a powerful rally without any meaningful confirmed pullback, which resulted in no setup for a “typical” buy signal. Thus, the primary bull market signal had to wait until the last recorded primary bull market highs were jointly broken up. 

As I explained here given the sheer magnitude of the rally that followed the 3/13/2020 primary bear market lows, it was legitimate and even “orthodox” (Rhea would have done so, as I will explain in a soon-to-be-published post) to shorten the time requirement for a secondary reaction, and following the pullback, derive the setup for a primary bull market.

I am reading Rhea’s Dow Theory Comment (available from Alanpuri Trading), and I can tell you that Rhea was nimble. He knew very well when to shorten the time requirement and even to exit near a top. His agility was sometimes difficult to digest for his subscribers. No wonder some disgruntled subscribers considered him heretical in his time and a bad follower of Dow’s teachings (even though now many label Rhea as orthodox, go figure!). The takeaway from reading how Rhea traded stocks in real-time is that he was intelligently flexible.

Here you have an updated chart:


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 signaled 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 a 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 previous 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 has been just 7 days of decline, and, thus, the time requirement for a secondary reaction against the strong bullish trend has not been met. However, given the magnitude of the shake-up, retracement of the last bull market swing, and the total percentage of the declines, I’d be inclined to shorten the time requirement so that the 03/18/2020 closing lows become the lows of a secondary reaction of just 7 trading days. One sensible trader might proceed as follows: Consider the 7 days decline as a secondary reaction, and, hence, as the basis for determining the setup for a primary bear market signal. At the same time, be more conservative and insist on demanding at the very least 10 days or even 3 weeks. Once we have two alternative setups, which may lead to actual sell signals, split the capital into two. 

All in all: both the primary trend remains bullish, and the secondary trend continues bullish if we stick with a 3 weeks’ time requirement for a secondary reaction.  However, if we consider the last pullback as a secondary reaction, the secondary trend would be bearish. Up to you to decide! Both alternatives set the basis for good trading and are not mutually exclusive.

On 04/01/2020 IEF bettered its last primary bull market closing highs of 03/09/2020 unconfirmed by TLT. On 4/21/2020 TLT equaled its last recorded primary bull market high of 03/09/2020 but could not better it. One tenet of the Dow Theory is that we need penetration, just one decimal or cent suffices. Hence, absent by a hair confirmation by TLT, the primary bull market has not been reconfirmed and, if we consider the last pullback as a secondary reaction, the secondary reaction has not been canceled. 

Here you have an updated chart. The grey rectangles display the “dubious” secondary reaction of just 7 days but associated with big declines both in terms of retracement of the preceding bull market swing  (ca. 75% for TLT retraced and ca. 50% for IEF) and the total percentage of the pullback (huge volatility, so a big movement percentage-wise). In my opinion, the charts are screaming at us “please shorten the time requirement for a secondary reaction; at least for half of your capital. Don’t ignore Rhea’s flexibility”. 


As I announced here, I joined Schannep’s “” as a contributing editor.

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As a reminder Subscribers to “” Letter get real-time information when action is required, something one cannot get in this blog. Furthermore, “” really helped Subscribers navigate through the recent turbulent waters as:

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One Dow Theorist

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