Primary trend for US bonds bearish when one appraises the trend with a longer-term view
I am writing before the close, so things might change. Readers beware.
GOLD AND SILVER
In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.
A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.
The primary trend was signaled as bearish on 8/6/2021, as was explained here.
There was a secondary reaction (explained here) that fizzled out. GLD and SLV made lower lows, and the primary bear market was reconfirmed, concluding the secondary reaction.
On 9/21/2021, SLV and GLD made their hitherto last recorded closing lows. A rally developed that qualifies as a secondary reaction, as both the time (11 days) and the extent requirement has been fulfilled. The Table below contains all the details:
Following the 10/14/2021 highs, there was a mini pullback lasting two days that did not meet the Volatility-Adjusted Minimum Movement (VAMM) on at least one ETF. Thus, the setup for a primary bull market signal was not completed. Accordingly, the confirmed breakup of the 10/14/2021 closing highs would not entail a bull market signal.
However, we have an alternative primary bull market signal: The highs of the last completed secondary reaction, namely the purple rectangles you see in the middle of the charts. This alternative entry/exit saved our bacon many times over (by exiting before it was too late or getting in before the market ran ahead of us). This post explains in-depth all the alternative bull market signals. The reverse is true for bear market signals.
Below the updated charts. The purple rectangles display the two secondary reactions that developed since the primary bear market was signaled. On the right side of the charts, you’ll find the current one, and the previous one on the middle of the charts. The small grey rectangles on the right side of the charts display the most recent pullback that failed to set up SLV and GLD for a primary bull market signal. The purple ellipses show daily divergences. The blue horizontal lines extending the closing highs of last completed secondary reaction display the price levels to be jointly broken up for a primary bull market to be signaled.
B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction.
The primary trend was signaled as bearish on 11/27/2020, as was explained here.
The primary bear market was reaffirmed on 9/17/2021, as was explained here.
The rally off the 9/29/2021 closing lows has not met the time requirement (at least 15 confirmed days), so no secondary reaction has been signaled.
GOLD AND SILVER MINERS ETFs
No time to write about them today. Just a short update.
A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.
The primary trend was signaled as bearish on 8/9/2021, as was explained here.
There was a secondary reaction against the primary bear market, as was explained here. The secondary reaction was canceled by lower lows made by SIL and GDX. Off the 9/21/2021 closing lows there was a rally that qualifies as a newer secondary reaction. There has been a mini pullback that was not enough to set up SIL and GDX for a primary bear market signal.
As with GLD and SLV, a confirmed breakup of the highs of the last completed secondary reaction (9/3/2021) implies a primary bull market signal.
B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction.
The primary trend was signaled as bearish on 8/9/2021, as was explained here.
Off the 9/21/2021 closing lows until 10/20/2021, there was a rally that qualifies as a secondary reaction.
US INTEREST RATES
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 appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.
The primary trend and secondary trend were signaled as bearish on 9/28/2021, as was explained here.
B) Market situation if one sticks to the traditional interpretation demanding at least three weeks and 1/3 confirmed retracement to declare a secondary reaction.
The primary
trend was signaled as bullish on 6/8/2021, as explained here.
TLT made its last highs on 7/19/21. IEF made its previous closing high on 8/3/21 unconfirmed by TLT (non-confirmation was a warning as to a likely change of, at least, the secondary trend). TLT declined for 18 trading days until 8/12/21 and -3.44%. IEF declined for just 7 days until 8/12/21 and -1.36%. The pullback for both ETFs exceeded the Volatility-adjusted minimum movement (VAMM). However, if we apply the “traditional” (and in my opinion, misguided) interpretation of the Dow Theory, we could not declare a secondary reaction given that the pullback did not reach at least 15 trading days on a confirmed basis.
Furthermore, the pullback that began on the last until the 8/12/21 closing lows retraced less than 1/3 of the previous bull market swing (the one that started on 3/18/21 for TLT and 4/1/21 for IEF).
However, and this pertains to the “traditional” interpretation of the Dow Theory, I see on the charts a “line” that formed between 8/13/21 and 9/3/21. Such a “line” was broken downside on 9/7/21 by both TLT and IEF. By itself, the breaking down of such a line could be construed as a bearish secondary trend (see this important post for more details as to how I equate the breakdown of a line with a secondary reaction for trading purposes).
The decline that followed the breakdown of the “line” made its low on 9/7/2021. From such a low, there was a rally. TLT broke topside on 9/14/2021 its 8/20/2021 line closing highs unconfirmed by IEF. On 9/22/2021, TLT broke up above its 7/19/2021 bull market highs once again unconfirmed by IEF. Not a good omen.
To add insult to injury, divergences (one ETF closing up whereas the other closed down) piled up. Such divergences occurred at relative tops on 8/4/21 and, more importantly, 8/20/21. On 9/1/21, there was a minor divergence (TLT close up and IEF down). Please remember that we successfully called the top for precious metals in August 2020 by observing several divergences that popped up on the rally leading to the top. Divergences, when properly applied, help us spot likely changes in the trend. As a reminder, the word “divergence” has three alternative technical meanings and contexts -more about them in our August 1st 2021 Letter to Subscribers.
If we focus on the rally that started off the 9/7/2021 closing lows, we’ll see that it lasted more than two days, and if you do the math, you’ll see that both ETFs rallied more than the VAMM (more about VAMM here). Hence, I can safely consider that the setup for a primary bear market signal was completed. Aggressive Dow Theorists could validly consider that the 9/7/2021 closing lows were the lows to be broken downside for a primary bear market to be signaled. More conservative Dow Theorists might consider the 8/12/2021 closing lows as the price levels to be jointly penetrated for a primary bear market signal to be signaled. I personally took the latter option.
The charts below display the price action:
THE SECULAR TREND FOR TLT & IEF COULD CHANGE
In my previous post, I mentioned that a joint violation of the 3/19/2021 closing lows on the weekly bars charts would end the current secular bull market and signal the start of a secular bear market. As of this writing, both TLT and IEF are not far from their 3/19/2021 closing lows.
The table below summarizes the price action from the last recorded secular bull market highs until now. You can see that as per the Dow Theory, a clear setup for a potential secular bear market signal has been completed. Please mind that the VAMM has been adjusted for weekly bars (5 trading days). Hence we require a higher value (namely the square root of 5 times the daily VAMM) for a movement to be meaningful.
Below the updated charts. The orange rectangles display the secondary reaction against the secular bull market, whereas the blue rectangles show the rally that set up both ETFs for a secular bear market signal. The red horizontal lines display the price levels to be jointly broken down for the secular bear market to be signaled.
Sincerely,
Manuel Blay
Co-Editor of thedowtheory.com
