Wednesday, June 9, 2021

Dow Theory Update for June 9th: Primary bull market in US bonds signaled on 6/8/2021


Bull market in precious metals and their miners continues in good health




General Remarks:


In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.


TLT is the iShares 20 years + Treasury bond ETF. More about it here


IEF is the iShares 7-10 years Treasury bond ETF. More about it here.


Thus, TLT tracks longer-term US bonds, whereas IEF tracks middle-term US bonds. A bull market in bonds entails lower interest rates. A bear market in bonds represents higher interest rates.


A) Market situation if one is to appraise secondary reactions not bound by the three weeks and 1/3 retracement dogma.


The primary trend was signaled as bearish on October 5th, 2020, as was explained in-depth here.

The secondary trend was bullish, as I explained in my 4/16/2021 post. The setup for a primary bull market was explained in my 5/28/2021 post.

On 5/25/2021, IEF broke up above its 4/22/2021 secondary reaction closing highs unconfirmed by TLT. The awaited confirmation came on 6/8/2021 when TLT broke topside its 4/22/2021 secondary reaction highs and, hence, a primary bull market was signaled.


Below the updated charts:



Now, let’s take a deeper look at the pullback that followed the 4/22/2021 secondary reaction highs. As you can see in the table below, it lasted from peak to trough 14 trading days. The percentage decline was -3.41% for TLT and -0.99% for TLT, which is more than the volatility-adjusted minimum movement (more about this vital concept, here). So the pullback meets the time and extent requirement for a secondary reaction.


So now that we know that TLT and IEF are in a primary bull market, we know that what we labeled as a secondary reaction against the bear market (so the rally that ended on 4/22/2021) is the first primary swing of the new primary bull market. The pullback that followed until the 5/12/2021 lows (which was the setup for a primary bull market signal) qualifies as the first secondary reaction against the first primary bull swing (ended on 4/22/2021).


Since we don’t need at least 15 trading days to declare the existence of a secondary reaction under this section, I consider a decline lasting 14 trading days (and satisfying the extent requirement) as enough to declare a secondary reaction.


So now we have to mark the vital 5/12/2021 closing lows. If such lows were jointly broken down by TLT and IEF, a primary bear market would be signaled. This is an excellent risk/reward trade, as our stop-loss lies at ca. -3.5% for TLT and -1% for IEF.


One closing remark:


I became quite bullish on TLT & IEF on April 16th, 2021, as I explained:


 “While, according to the Dow Theory, no primary bull market signal has been given, those brave of heart might test the waters by starting a modest long position.(…) Three moderate bullish developments have occurred: A non-confirmation, a bullish breakup of a line, and a bullish secondary reaction. While the addition of three “moderate” bullish factors does not result in a primary bull market, I see, though, that something is changing on the charts." (emphasis supplied)


Now let’s see what happens. Anything can happen in any given trade. We deal with probabilities, not certainties. However, when several trades pile up, a picture of outperformance and reduced drawdowns emerges.  


B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement in order to declare a secondary reaction.


The primary trend was signaled as bearish since January 6th, 2021, as was explained here.


I considered the secondary trend as bullish since 4/15/2021 as a “line” was broken up by TLT and IEF.


In my post of May 28th , I considered that the setup for a primary bull market signal had been completed. Thus, the confirmed breakup of the 4/22/2021 closing highs entails a primary bull market signal.


Unlike the “short-term” application of the Dow Theory (see above), the pullback that followed the 4/22/2021 highs does not qualify as a secondary reaction, as it didn’t reach the 15 trading days’ threshold. So while the pullback was enough to set up TLT & IEF for a primary bull market signal, it does not meet the strict 15 trading days requirement.


So, as per the “strict” interpretation of the Dow Theory, our stop-loss would be placed at the last primary bear market lows, as you can see on the table below. If the 3/18 (TLT) and 3/30 (IEF) bear market lows were jointly broken down, a primary bear market would be signaled. Our likely loss in case the primary bear market lows were broken downside would be ca. -4.65% for TLT and -1.81% for IEF. Given IEF's low volatility, I personally don't trade it. So I am only long TLT.



Here you have the updated charts:



Manuel Blay

Co-Editor of

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