Bullishness in precious metals and US interest rates unabated
US STOCKS
Schannep’s
Dow Theory (more properly: The Dow Theory for the 21st Century)
At 06/1/2020,
the primary trend was bullish since April 6th, 2020,
as was explained here
The April 6th,
2020 Buy signal (caused by a Bull market definition) was not an easy one to act
upon, as it was given at ca. 19% (for the S&P 500) off the bear market bottom. Fear
that the market was already overextended and fear of a big loss should the
market decline revisiting the 03/23/2020 bear market lows resulted in some
investors expressing concern. An in-depth study about the viability of the Buy
signal of April 6th, 2020 is available in our June 1st, 2020 Letter to
Subscribers of thedowtheory.com. I know many followers of this blog have become
Subscribers, so read carefully the June 2020 Letter. For those still sitting on
the sidelines, I encourage you to take advantage of the free trial I offer at the end of
this post.
Now let’s focus on the secondary trend. The last
recorded highs were made on April 29th, 2020, and the last recorded lows were
made on May 13th, 2020, which amounts to 10 trading days for each index and
hence an average of 10 trading days. Furthermore, at least two indexes should
have declined for two calendar weeks, which was accomplished as well. So, the time requirement for a secondary
reaction was met. As to the extent
requirement all three indexes declined more than 3% and, thus, the extent
requirement was also met. Therefore, on May 13th, 2020 a
secondary reaction was signaled.
Off the May 13th 2020 secondary
reaction lows all indexes rallied. The S&P 500 broke up its 4/29/2020 unconfirmed.
Finally, on 5/26/2020 the Industrials and Transports confirmed (we only needed
confirmation by one index) and the secondary reaction was ended and the primary bull market reconfirmed. All
in all, the secondary trend is also
bullish.
Here you have an updated chart showing the price
action since the bear market bottom of 3/23/2020 to date.
“Rhea’s
/classical" Dow Theory
The primary trend is bullish since 4/29/2020 as explained here. This primary bull market signal was determined by just demanding 13 and 18 trading days for the appraisal of the secondary reaction that led to the primary bull market signal.
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.
 |
| Primary bull market signaled on 4/29/2020 if we appraise a secondary reaction with just 13 days for the Transports |
However, if we strictly demanded, like purists do
(please mind that Rhea was not a purist, as explained here) 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 -5.6% and the Transports -10.05% until their lows of
5/13/2020 and 5/15/2020 respectively, so the setup for a primary bull market was
completed. From such pullback lows, there was a rally which broke up the April
29th secondary reaction highs on a confirmed basis on 05/26/2020 and hence a primary bull market was signaled on that date.
So, no matter how we appraise the secondary reaction, the primary
trend is bullish according to the classical Dow Theory.
Here you have an updated chart:
 |
| If we demanded 3 weeks for a secondary reaction, the primary bull market would have been signaled on 5/26/2020 |
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, as explained here)
until 05/15/2020. 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.
So, anyway we cut it, the primary trend is bullish for SIL and GDX.
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.
So, anyway we cut it, the primary trend is bullish for SIL and GDX.
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) to shorten the time requirement for a secondary
reaction, and following the pullback, derive the setup for a primary bull
market.
Here you have the updated charts:
Here you have the updated charts:
 |
| Two alternative entries, depending on the way one appraises secondary reactions |
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. From Rhea's deeds and writings, we can see 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).
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”.
 |
| The primary bull market continues |
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 until June 15th, 2020 a free
two months subscription. For a FREE Trial, send an email with
your name
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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 in April confirming this up market
5) Our first target under the Rule of Seven was successfully met and 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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