Dow Theory Update for May 27: Finally, a secondary (bullish) reaction has been signaled for US bonds

The primary trend remains bearish, though

 

It has been a long time without providing an update concerning US bonds. In fact, it was not necessary as the trend has been “down” for many months now, so no changes occurred.

 

I am writing before the close, so things might change. 

 

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 was signaled as bearish on 1/5/22, as I explained here.

After the onset of the primary bear market, prices went down unabatedly. The occasional rallies were so modest and short-lived that none of them qualified as a secondary reaction.

On 5/6/22, both TLT and IEF made their last recorded closing lows. A rally ensued until 5/25/22 that lasted 13 trading days. Accordingly, the time requirement for a secondary reaction was met. As to the extent requirement, both ETFs percentage-wise rallied more than the Volatility Adjusted Minimum Movement (VAMM), so the extent requirement was also met, and we can declare the existence of a secondary (bullish) reaction against the still existing primary bear market.

The Table below contains all the relevant data:

 

What options do we have now from a Dow Theory perspective?

 

1) We are waiting for a pullback on both TLT & IEF. If such a pullback exceeds the VAMM on at least one ETF and last 2 confirmed days, then the setup for a primary bull market would be completed.

 

2) Such a pullback may continue lower until the 5/6/22 lows are jointly broken down by TLT and IEF, in which case, the primary bear market would be reconfirmed, and the secondary reaction canceled.

 

3) No pullback unfolds, and prices continue up until the last recorded primary bull market highs (12/3/21) are jointly broken topside, which would signal a new primary bull market. This is an improbable event, as a setup for a primary bull market will, most likely, develop at lower price levels.

 

The rough charts below serve to show the three alternatives:

 

 OPTION ONE: A pullback sets up both ETFs for a primary bull market signal

 

 

OPTION TWO: The pullback breaks down below its Bear market  lows

OPTION THREE: No pullback unfolds, rally continues until breaking up last bull mkt highs

And below you have the updated charts. The violet rectangles on the right side of the charts show the current secondary reaction. They grey rectangles in the middle of the charts display a rally that did not qualify as a secondary reaction.

 

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

 

The primary trend was signaled as bearish on 9/28/21. A more aggressive and legitimate interpretation would have signaled the bear market on 9/24/21. The explanations here.

 

In my 12/3/21 post, I wrote that the rallies that had until then developed did not qualify as a secondary reaction. The situation has not changed, as the current rally has not fulfilled the time requirement. 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Update for May 26: Catching up with precious metals & their ETF miners

 

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 bullish on 11/11/21, as I explained here. Despite the current pullback, the trend remains bullish.

 

The secondary trend is bearish (secondary reaction against the primary bull market). Following the 3/8/22 closing highs (Step #1 Table below), GLD declined for 47 trading days until 5/13/22. SLV fell until 5/12/22 and 46 trading days (Step #2). SLV broke down below its 12/09/21 last recorded bear market lows unconfirmed by GLD. Absent confirmation, no primary bear market was signaled. The pullback amply satisfies the time requirement for a secondary reaction. As to the extent requirement, it’s been more than met, as you can see in the Table below. 

 

 

Off the 5/12/22 (SLV) and 5/13/22 (GLD) lows, both ETFs rallied until 5/24/22 (Step #3 Table above). Such a rally exceeds the Volatility-Adjusted Minimum Movement (VAMM) and, thus, completes the setup for a primary bear market signal. 

 

From a Dow Theory perspective, there are three possible outcomes:

 

1) Either GLD and SLV jointly break up above their last 3/8/22 bull market highs (Step #1), in which case the primary bull market would be reconfirmed and the secondary reaction terminated.

 

2) Or GLD and SLV jointly break down below their secondary reaction lows (Step #2) which would signal a primary bear market. 

 

3) Or GLD breaks down below the lows of the last completed secondary reaction (12/2/21 @ 165.24) which would confirm SLV’s breakdown  and signal a primary bear market. 

 

We don’t anticipate events. We put our emotions aside. Now we have two distinct outcomes and are waiting for market action to unfold.

 

Below the updated charts showing the price actions since the last bull market highs until now. The brownish rectangle displays the secondary reaction, and the violet rectangles highlight the most recent rally that set up both precious metals for a primary bear market. The red horizontal  line displays the price level of the closing lows of the last recorded primary bear market lows (12/09/21) which were not confirmed by GLD. Please mind the blue ellipse at the bottom of each chart. It shows divergence. On 5/13/22, GLD closed down while SLV closed firmly up. Divergences usually are harbingers of a trend change.

 

 

One of the tenets of the Dow Theory is that we give the benefit of the doubt to the present bullish trend. Until countermanded by a bear signal, it remains bullish.

 

GOLD AND SILVER MINERS ETFs

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

The primary trend was signaled as bullish on 3/10/22, as I explained here. Despite the current pullback, the trend remains bullish.

 

On 4/13/22, SIL made its last recorded closing highs. GDX did so on 4/18/22. Please mind that on 4/14 and 4/18, GDX edged higher while SIL closed lower. Another case of divergence that heralded the onset of the current secondary reaction. Following such highs (Step #1 on the Table below), SIL and GDX dropped until 5/12/22 (Step #2). Such a drop amply met the time and extent requirement for a secondary reaction. Following such lows, SIL rallied until 5/26/22 and GDX until 5/24/22. Such a rally exceeds the Volatility-Adjusted Minimum Movement (VAMM) and, thus, completes the setup for a primary bear market signal. 

 

The Table below contains all the relevant data:

 

 

Please mind that on 5/6/22, SIL broke down below its last recorded primary bear market low on 1/28/22, unconfirmed by GDX. Since there was no confirmation, no primary bear market was triggered, and the bull market remains in force.

 

As with GLD and SLV, from a Dow Theory perspective, there are three possible outcomes:

 

1) Either GDX and SIL jointly break up above their last recorded bull market highs (Step #1), in which case the primary bull market would be reconfirmed, and the secondary reaction terminated.

 

2) Or GDX and SIL jointly break down below their secondary reaction lows (Step #2) which would signal a primary bear market.

 

3) Or GDX breaks down below the last primary bear market lows (1/28/22 @ 29.30) which would confirm SIL’s breakdown and signal a primary bear market too. 

 

The charts below display the most recent price action. The red horizontal lines show the lows of the last primary bear market, which were broken down by SIL and unconfirmed by GLD. The blue ellipses show the divergence that occurred just before the onset of the current secondary reaction. The brownish rectangles show the current secondary reaction, and the violet rectangles show the most recent rally, which set up both ETFs for a primary bear market signal.

 

No more time is available today. Soon I will update you about the trends for precious metals and their ETF miners when one takes a somewhat longer-term perspective.

I hope to post tomorrow an update on US bonds.

Sincerely,

Manuel Blay

Editor of thedowtheory.com