Dow Theory Update for July 23: Primary bull market in U.S. bonds signaled on 7/22/22

 

The primary & secondary trend for precious metals remains bearish

 

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.

Following a secondary (bullish) reaction against the bearish trend which was explained here. The setup for a primary bull market signal was completed on 7/8/22, as we explained in this post.

On 7/22/22, TLT and IEF broke topside their 7/5/22 secondary reaction highs (Step #2 in the table below), and, hence, a primary bull market was signaled. We cannot predict whether this new bull market will have long legs or not. What we know is that when we take several trades, a pattern of significant outperformance and drawdown reduction versus Buy and Hold emerges, as explained in these three posts:

http://www.dowtheoryinvestment.com/2022/02/dow-theory-update-for-february-16-does.html

http://www.dowtheoryinvestment.com/2022/03/dow-theory-update-does-dow-theory-work.html

http://www.dowtheoryinvestment.com/2022/03/dow-theory-update-does-dow-theory-work_22.html

 

 

A new bull market (at least in our time frame) seems to indicate that inflation will be tamed through a recession

Below you have the updated charts.

 

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.

The rally off the 6/14/22 closing lows lasted 26 trading days. Therefore, the time requirement for a secondary reaction has been met. As to the extent requirement, if we require 1/3 confirmed retracement of the previous bear swing, the retracement is around 20% for TLT and 24% for IEF. On the other hand, if we just require that the rally exceed the Volatility-Adjusted Minimum Movement (more explanations here), the extent requirement would have been met. Up to each trader to make a judgment call.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Update for July 15: Setup for a potential primary bull market in U.S. bonds completed on 7/8/2022

All trends for precious metals & their ETF miners remain solidly bearish

I am writing before today's close, so things might change. Readers beware.

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. 

As I explained on 7/6/22, the secondary trend is bullish (secondary reaction against the primary bear market). Following the 7/5/22 closing highs, a three days pullback ensued. As you can read in the table below, such a pullback sets up TLT and IEF for a primary bull market signal (drop >=2 days and percentage-wise, the decline exceeds the Volatility-Adjusted Minimum Movement) 

So, now we have two possible outcomes:

1.      If TLT and IEF jointly break topside their 7/5/22 secondary reaction closing highs (Step #2), a primary bull market will be signaled. A new primary bull market in bonds would imply that a recession is nigh, as the markets discount lower inflation and a flight to safety.

 

2.      If TLT and IEF jointly break down below their 6/14/2022 bear market lows (Step #1), the primary bear market will be reconfirmed, and the secondary reaction terminated.

 

The charts below depict the most recent action. On the left side of the charts, the deep blue rectangles show the previous secondary reaction, which was canceled by lower lows. The light blue rectangles on the right side of the charts display the current secondary reaction. The brown rectangles on the right display the most recent pullback that set up both ETFs for a potential primary bull market. The blue horizontal lines highlight the closing highs of the current secondary reaction (Step #2). A confirmed breakup would imply a primary bull market signal.

 

 

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. Newer lower lows on 6/10/22 by IEF and 6/13/22 by TLT reconfirmed the primary bear market. The bounce that started off the 6/14/22 lows has not reached the minimum 3 weeks (15 trading days), so we cannot talk of a secondary reaction. So, the primary and secondary trend remains bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Update for July 6: U.S. bonds are in a secondary reaction against the bear market

 Are bonds signaling an impending recession?

 

I am writing before today's close, so things might change. Readers beware.

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.

 

On 6/13/22, the primary trend was reconfirmed as bearish with lower confirmed lows.

 

Following the 6/14/22 closing lows a new rally started. On 7/5/22, TLT and IEF have bounced for 13 trading days, which satisfies the time requirement. As to the extent requirement, it has amply been met (7.28% for TLT and 5.57% for IEF, which vastly exceed the Volatility-Adjusted Minimum Movement, VAMM), as you can see in the Table below.

 

So now we have the following options: 

a)      a) If a pullback unfolds, lasting at least 2 trading days and with at least one ETF exceeding the VAMM, then the setup for a potential primary bull market signal will have been completed.

b)      b) Suppose no such pullback develops and TLT & IEF continues going up. In that case, a confirmed breakup of the highs of the last completed secondary reaction (violet rectangles) would signal a primary bull market as well.

c)      c) If both ETFs roll over and pierce their 6/14/22 lows jointly, the primary bear market would be reconfirmed.

The charts below display the most recent action. The violet rectangles with the horizontal blue lines show the highs of the last completed secondary reaction, which is a valid breakup point to signal a primary bull market. The blue rectangles on the right side of the charts highlight the current secondary reaction. 

 

It looks like the bond markets see a recession ahead: flight to safety and lower inflation.  However, the bond’s market verdict will be more precise once the primary trend turns bullish, which is not the case right now as we are merely dealing with a secondary (bullish) reaction amid a bearish trend.

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. Newer lower lows on 6/10/22 by IEF and 6/13/22 by TLT reconfirmed the primary bear market. The bounce that started off the 6/14/22 lows has not reached the minimum 3 weeks (15 trading days), so we cannot talk of a secondary reaction. So, the primary and secondary trend remains bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com