Are bonds sensing a recession?
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.
As I explained HERE, the primary trend was signaled as bearish on 9/20/22.
On 10/20/22, IEF bottomed. TLT made its last lows on
10/24/22. Following such lows, both ETFs rallied until 12/7/22. The rally
lasted 31 trading days for TLT and 33 for IEF. Therefore, the time
requirement for a secondary reaction has been fulfilled. As to the extent
requirement, TLT rallied 18.47% and IEF 6.68%, so the extent requirement
for a secondary reaction has been met too. Both rallies have amply exceeded the
Volatility-Adjusted Minimum Movement (VAMM). More about the VAMM here.
Following the 12/7/22 closing highs, both ETFs dropped
until 12/09/22. The decline lasted 2 days (time requirement met) and exceeded
the VAMM, and hence the setup for a potential primary bull market signal
has been fulfilled.
The table below displays the key price levels since the market bottom until now:
So, now we are faced with the following options:
1. If TLT and IEF jointly broke up the 12/7/22 closing highs, a primary bull market would be signaled.
2. If the 10/20/22 (IEF) and 10/24/22 (TLT) lows were jointly violated, the primary bear market would be reconfirmed.
The chart below displays the price action that led to the current setup for a potential primary bull market signal. The blue rectangles highlight the present secondary reaction against the still-existing primary bear market. The brown rectangles show the most recent pullback that set up both ETFs for a primary bull market signal. The grey rectangles within the blue rectangles display pullbacks that did not reach the VAMM to complete the setup for a primary bull market signal. The blue horizontal lines show the relevant price levels (secondary reaction tops) that must be broken topside for a primary bull market signal. The red horizontal lines show the primary bear market lows. If jointly broken down, the primary bear market would be reconfirmed.
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.
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
In this specific instance, the price action that was explained above fully applies to the “longer term” rendering of the Dow Theory. In other words, look at the table and charts above, as they fully explain what has been going on when we take a longer view. Therefore, the primary trend is bearish, the secondary trend is bullish and the setup for a potential primary bull market signal has been completed.
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