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