Any way we measure secondary reactions both precious metals and their miners ETFs are in a primary bull market
US STOCKS
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.
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 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:
GOLD AND SILVER
MINERS ETFs
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.
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:
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
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 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”.
ANNOUNCEMENT
As I announced here, I joined Schannep’s “thedowtheory.com” as a
contributing editor.
As an
expression of gratitude to the followers of this blog, and as an invitation to
follow me on my new home “thedowtheory.com”,
I will be offering for the next few weeks a free
two months subscription. For a FREE Trial, send an email with
your name
SUBJECT: Free
Trial
That's it!
As a reminder Subscribers
to “thedowtheory.com” Letter get real-time information when action is required,
something one cannot get in this blog. Furthermore, “thedowtheory.com” really
helped Subscribers navigate through the recent turbulent waters as:
2) Our definition of a Bear market beat all others to the punch in March
3) Capitulation (the time to start buying) was signaled throughout two
weeks in March
4) Our definition
of a Bull market was met earlier last month confirming this up market
5) We have once again determined the upcoming Rule of Seven target for the
new bullish swing.
While my blog is
instructive and remains a valuable tool to dig deep into vital aspects of the
Dow Theory, those truly intent on getting actionable and real-time advice with
a proven and disclosed record should use “thedowtheory.com” as a companion to
this blog.
Sincerely,
One Dow Theorist
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