Monday, October 11, 2021

Dow Theory Update for October 11: Primary bear market for US bonds signaled on 9/28 when one takes a shorter-term view


US bonds are reaching a critical level when one appraises the secular trend with weekly bars




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 bullish on 6/8/2021, as explained here.


On 9/29/21, I briefly explained that the primary trend turned bearish on 9/28/2021. Today I provide an in-depth explanation of the current bear market signal. 


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).


At the 8/12/21 closing lows, it was not clear whether the pullback could qualify as a secondary reaction or not. While I am flexible when appraising secondary reactions when not bound by the “three weeks dogma”, 7 days for IEF is a little bit too short. While I accepted pullbacks as short as 7 trading days in the past, it is true that the less time available, the more extent (percentage move) I demand. In the present case, neither ETF had a sizeable movement. It was above the VAMM but certainly nothing resembling the volatility experienced by TLT and IEF in March 2020 when I declared the existence of a secondary reaction with just 7 days.


Readers of this blog know that my rule of thumb is that the more “extent”, the less “time” I require. So in the present instance, a mild decline lasting only 7 days for IEF made me wait for ensuing price action to declare the existence of a secondary reaction. As an aside, Rhea in many cases did not proclaim the existence of a secondary reaction based on the last recorded lows (or highs) but waited for subsequent action (i.e., a zig-zag pattern, volume expanding on rallies, etc.). In dubious cases, what happens after the lows (highs) of the alleged secondary reaction is vital to determine whether we only have an ordinary pullback (rally) or a real secondary reaction.

Please mind that I was long TLT, so I needed to know whether a violation of the 8/12/21 closing lows was a primary bear market signal (Sell) or merely a lower low.


Subsequent price action was telling:


1. Between 8/13/21 and 9/3/21, a “line” developed that was broken downside on 9/7/21. By itself, the breaking down of such a line could be construed as a bearish secondary trend. After the joint breakdown of the line, TLT broke it topside unconfirmed by IEF, which was neutral to bearish. Therefore, the overall reading was bearish.

2. On 9/22/21, TLT bettered its 7/19/21 primary bull market closing high unconfirmed by IEF. So lack of confirmation at a previous bull market top was bearish. The very existence of the bullish primary trend was challenged.

3. There were divergences (one ETF closing up whereas the other closed down) 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.

Thus, I concluded that the pullback finishing on 8/12/21 constituted a real secondary reaction based on the above. The rally that followed such lows set up both EFTs for a primary bear market signal. On 9/7 and 9/17/21, IEF broke down below its secondary reaction 8/12/21 closing lows, whereas TLT did so on 9/28/21.


Below you have the table providing the relevant data.


 All in all, on 9/28/21, TLT, by confirming IEF signaled a primary bear market.


Here you have an updated chart. 



The TLT trade taken on 6/8/21 was a winner. However, we should not get too thrilled with the outcome of any given trade, as anything can happen. We need several trades for a picture of profits to emerge. When taking trades that may last on average one year or more, we need at least to wait for five years to draw meaningful conclusions, as this post and the links contained therein explain.


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.


To be explained in a future post. Time as always in short supply.


More important than the appraisal of the trend when one takes at least 3 weeks for a secondary reaction, is the pattern I see when one applies the Dow Theory to TLT and IEF based on weekly charts. If the 3/19/21 closing lows were jointly violated a secular bear market for TLT and IEF would be signaled. I hope to provide more details in my next post.



Manuel Blay

Co-Editor of

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