Tuesday, December 8, 2020

Dow Theory Update for December 8: Secondary reaction successfully terminated and primary bull market reconfirmed

Trends unchanged for precious metals, their miners ETFs and US interest rates

 

Today we focus on US stock indexes.

 

Given that neither the primary nor the secondary trend has changed for precious metals, their miners ETFs and US interest rates, please go to the following posts for the latest assessment of trends:

 

US BONDS:

http://www.dowtheoryinvestment.com/2020/10/dow-theory-update-for-october-6th.html

 

Gold and Silver miners ETFs

 

http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-24th.html


Gold and Silver


http://www.dowtheoryinvestment.com/2020/11/dow-theory-update-for-november-28th.html


US STOCKS

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

 


On 12/02/2020, 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 significant 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 and why it was served on a silver platter, is available in our June 1st, and November 1st 2020 Letters to Subscribers of thedowtheory.com. Since many followers of this blog have become Subscribers, please read both Letters carefully. For those still sitting on the sidelines, I encourage you to become Subscribers, as you are missing a great piece of the action and ongoing research and Jack Schannep’s own market wisdom. Many things are going on in our monthly Letter and, importantly, Subscribers are alerted in real-time of any impending Buy or Sell signal.

 

The S&P 500 and the Industrials made their last recorded highs on September 2nd. The Transports did so on September 16th. From such highs, all indices declined until September 23rd. Since the decline amply exceeded 3% on a confirmed basis, so the extent requirement for a secondary reaction was met. The pullback for the three indices averaged 11 trading days, which satisfied the time requirement. So the secondary trend turned bearish (secondary reaction against the primary bull market).

 

The Transports broke topside on 10/07/2020, its last recorded primary bull market highs (9/16/2020) unconfirmed. Thereafter, the Industrials and Transports broke down below their 9/23/2020 secondary reaction lows unconfirmed, as the S&P 500 refused to pierce its 9/23 closing low. Pease mind that under Schannep’s Dow Theory, the S&P 500 must confirm for a signal to exist, as was explained here.

 

So we were in no man’s land: Topside and downside breakouts unconfirmed.

 

On 11/9/2020 the Industrials broke topside its September 2nd closing highs. The S&P 500 finally did so on 11/13/2020 and, hence, the secondary reaction was successfully ended and the primary bull market reconfirmed.

 

Here you have a chart displaying the price action until December 2nd.

 


“Rhea’s /classical" Dow Theory

 

A) Market situation if one is to appraise secondary reactions not bound by the 3 weeks dogma.

 

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 to appraise the secondary reaction that led to the primary bull market signal.

 

Some months ago I wrote a “saga” (here, here and here) where I made clear that neither the 15 days time requirement nor the 1/3 extent requirement is carved in stone. While most secondary reactions will last more than 15 days and retrace 1/3 of the previous swing, one should remain flexible, even under the “Rhea/classical” Dow Theory.

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. Under a flexible interpretation of the Dow Theory, and given that since the last recorded confirmed highs 41 trading days have also elapsed for the Transports), I’d be inclined to say that the time requirement could have been met provided the extent of the decline makes up for the lack of time. 

 

Thus, I’m willing to be accommodative as far as the decline has been sizeable. In other words, the more “decline” the less stringent I am with the “time” element. However, the Dow Transports has not remotely retraced 1/3 of the previous bull swing (which started at the lows of 3/23/2020, as no secondary reaction has been signaled to date). The Industrials haven’t retraced 1/3 of the previous swing either. Thus, given that the extent requirement has not been met, I’d need more days of declining prices in order to consider the time requirement as fulfilled.

 

All in al, even under a “Rhea-like” interpretation of the Dow Theory, I feel that neither the time nor the extent requirement has been met, and hence we cannot talk of a secondary reaction.

 

Following the pullback that did not qualify as a secondary reaction, the Industrials broke topside their 9/2/2020 closing highs on 11/9/2020. The Transports broke up above their 10/15/2020 closing highs on 11/10/2020. So confirmed higher highs means that the primary bull market has been reconfirmed.

 

Here you have an updated chart. The grey rectangles display declines that do not qualify as a secondary reaction and the final breakup. 

 


 

B) Market situation if one sticks to the traditional interpretation demanding more than three weeks of movement in order to declare a secondary reaction.

 

For those strictly demanding more than 15 confirmed days of declining prices, the primary bull market was signaled on 5/26/2020. More details about this alternative signal are to be found in our June 1st, 2020 Letter to Subscribers.

 

The last recorded primary bull market highs were made on 9/2/2020 by the Industrials and 10/15/2020 for the Transports. The Industrials declined for 41 trading days until 10/30/2020, the Transports did so until 10/28/2020 and 9 trading days. So the time requirement has not been met (the Transports is far from 3 weeks). Absent the time requirement, I don’t even bother with the extent requirement.

 

Following the pullback that did not qualify as a secondary reaction, the Industrials broke topside their 9/2/2020 closing highs on 11/9/2020. The Transports broke up above their 10/15/2020 closing highs on 11/10/2020. So confirmed higher highs means that the primary bull market has been reconfirmed. 

 Here you have an updated chart. Grey rectangles imply a pullback that does not qualify as a secondary reaction.

 


 Sincerely,

Manuel Blay

 

 

 

 

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