Wednesday, June 3, 2020

Dow Theory Update for June 3: US stocks in a primary bull market under all Dow Theory flavors

Bullishness in precious metals and US interest rates unabated


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 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.


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, 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. 

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:

Two alternative entries, depending on the way one appraises secondary reactions



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


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