Saturday, September 23, 2023

Dow Theory Update for September 23: Primary bear market in U.S. bonds reaffirmed on 9/21/23

 The bear market in bonds continues…

General Remarks:

In this post, I thoroughly explained 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. Following the October 2022 bear market lows, a rally ensued, qualifying as a secondary (bullish) reaction against the primary bear market. Finally, a pullback set up TLT and IEF for a potential primary bull market. This post contains all the details.

On 1/12/2023, IEF pushed through its 12/7/22 secondary reaction highs unconfirmed by TLT. The lack of confirmation implied that the trend had not changed from bearish to bullish. I explained in this post the details concerning the failed breakup, which incidentally was a great shorting opportunity.

After the unconfirmed breakup by IEF, both ETFs headed lower for several months. On 9/19/23, IEF penetrated its 10/20/22 primary bear market lows. On 9/21/23, TLT broke down below its 10/24/22 lows, providing confirmation. The Table below shows you the details:

So, the implications of the newer lows are as follows:

1) The secondary reaction against the primary bear market has been terminated. Now the secondary trend is also bearish.

2) The setup for a potential primary bull market has been canceled

3) The primary bear market signaled one year ago, on 9/20/22 has been reaffirmed.

The charts below provide a visual representation of price action in the market over the past year, spanning from the lows observed one year ago to the present day. The blue rectangles on the charts indicate the secondary (bullish) reaction against the primary bear market. In contrast, the brown rectangles represent the initial pullback that set up both ETFs for a potential primary bull market. Notably, the blue arrow highlights IEF’s breakout above its secondary reaction highs, a move that was not confirmed by TLT, thereby protecting us from a whipsaw. The red horizontal lines highlight the primary bear market lows of October 2022, which have been recently pierced.


Therefore, it appears that the bond market is currently not factoring in the likelihood of an imminent recession. Recessions typically compel the Fed to ease, while demand contraction tends to squelch inflation.

Another noteworthy observation is that the recent decline in bond prices occurred concurrently with a sharp drop in the stock market. This type of price movement mirrors what was observed in the 1970s and is characterized by a term: Stagflation.

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 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 and secondary trend is bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Tuesday, September 19, 2023

Dow Theory Update for September 19: No changes in trends but something is going on with gold

 All the last updates I produced for gold/silver, GDX/SIL, and TLT/IEF and the U.S. stock market remain unchanged. Markets are like a coiled spring, and the final breakout will likely carry out significant follow-through. 


However, while markets remain range-bound, something is going on with physical gold. I recently found a Bloomberg article indicating that Shanghai's gold is commanding a $120 premium over international prices. Is this normal? Is there a shortage of physical gold and an overabundance of paper gold? I still don't know, but the chart is telling. 


 
Furthermore, I got to know that premiums for gold bars in Switzerland are also going to the roof. Temporary scarcity of physical vs. paper gold? Future events will shed more light.


Sincerely,

Manuel Blay

Editor of thedowtheory.com

Thursday, August 31, 2023

Dow Theory Update for August 31: Gold and Silver may trigger a new primary bull market soon

The setup for a primary bull market was completed on 8/2/23

General Remarks:

In this post, I thoroughly explained the rationale behind my use of two alternative definitions to appraise secondary reactions.

GOLD AND SILVER

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

I explained HERE that gold and silver have been in a primary bear market since 6/21/23.

Following the June 2023 lows, a rally followed that qualified as a secondary reaction against the primary bear market. More details about the secondary reaction HERE.

A pullback followed. On 8/17/23, GLD broke down below its 6/29/23 primary bear market lows at 177.09 unconfirmed by SLV. SLV stopped its plunge on 8/16/23 at 20.56 without violating its 6/22/23 primary bear market lows at 20.53. As shown, in the table below the pullback lasted >=2 days and amply exceeded the Volatility-Adjusted Minimum Movement (more about the VAMM HERE). Thus, the setup for a potential primary bull market signal has been completed. The Table below shows the details:

a) A new primary bull market will be triggered if GLD and SLV jointly break topside their respective bounce highs (Step #2 in the above Table) at 183.64 and 23.10, respectively.

b) If SLV broke down below the 6/22/23 low at 20.53, confirming GLD’s previous breakdown, the primary bear market would be confirmed, and the secondary reaction would be terminated.

The chart below illustrates the most recent price action. The red lines show the primary bear market lows (Step #1). The blue rectangles display the secondary (bullish) reaction against the bear market (Step #2). The blue horizontal lines highlight the secondary reaction highs, which are the relevant levels to be jointly surpassed for a new bull market to be signaled. The brown rectangle displays the pullback on the date when the setup for a potential primary bull market was completed:

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction. 

As I explained HERE, the primary trend was signaled as bearish on 6/21/23.

The latest rally has not persisted for a minimum of 15 confirmed trading days, leading to the absence of a secondary reaction.

Consequently, both the primary and secondary trends remain bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

 

Tuesday, August 15, 2023

Dow Theory Update for August 22: The Principle of Confirmation can save your skin (II). Example 2: IEF breakup turned into a bull trap.

In my previous post, I explained the principle of confirmation in action when applied to U.S. stock indexes. In this post, we will see its application to bonds.

The starting point is the primary bear market that was signaled on 9/20/22 (as explained HERE). Following the 10/24/22 bear market lows, a rally followed that qualified as a secondary reaction. On 1/12/23, IEF surpassed its 12/7/22 secondary reaction highs, but TLT did not confirm. In light of this lack of confirmation, the trend remained unaltered and did not transition to bullish, thereby refraining from triggering a Buy signal. Subsequent price movements distinctly leaned toward the bearish, effectively categorizing the earlier breakout as a bull trap. Fortunately, TLT's refusal to confirm proved to be our shield.

Incidentally, this situation also presented an excellent opportunity for shorting. The primary trend, which was bearish, invariably guides our actions under the assumption that the primary trend will ultimately dictate outcomes. In this context, the absence of confirmation following a bullish breakout indicated a higher probability of bonds trending downward. Around February 3rd, a prime shorting opportunity materialized: both TLT and IEF resumed their downward trajectory, while our stop-loss in case of a newly confirmed rebound was very near our shorting price (some ticks above the 2/2/22 highs). So, the risk-reward of that trade was huge.

To capitalize on this situation, I personally employed an inverse leveraged ETF (TBT) to leverage the tight stop-loss. I opted to exit the trade several days later, securing a significant reward relative to the risk undertaken.

The accompanying charts visually represent the price movements in question. 

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

Dow Theory Update for August 15: The Principle of Confirmation can save your skin. Example 1. Dow Transportation breakdown

My next post will deal with a similar case in bonds

One fundamental tenet of the Dow Theory holds that the movement of one index, when not confirmed by another, should be disregarded. This principle underscores that a Buy or Sell signal originating from one index, such as surpassing a prior high or breaking down below a previous low, carries no significance if it lacks validation from another index.

A recent instance illustrating the significance of this principle involves the Dow Transportation (DJT) index. The trend has been bullish since 11/8/22. On 4/26/23, the DJT broke below the last recorded secondary reaction lows. However, the DJI (or the S&P500, for that matter) did not confirm. Such a breakdown was bearish, but unconfirmed did not have the power to reverse the trend. Hence, no Sell signal was given, and we continued being long stock indexes. The breakdown was a fake out, and thereafter all Indexes rallied higher until the last recorded bull market highs (green horizontal lines) were jointly bettered, and our 11/8/22 Buy signal was confirmed. All in all, the principle of confirmation helped us avoid a false sell signal and a nasty whipsaw.

The accompanying charts visually represent the price movements in question.

 

It's worth noting that the principle of confirmation extends beyond the confines of the Dow Theory. As I expounded upon HERE, it finds application in other trend-following techniques, including moving averages. Additionally, there are indications that it holds relevance in the realm of cryptocurrencies. It's important to note that my assessment is preliminary, as I would prefer a more extensive dataset, given that cryptos have a relatively short history. However, thus far, the principle seems to hold true.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 


Saturday, July 22, 2023

Dow Theory Update for July 22th: Secondary reaction for gold and silver signaled on 7/18/23.

 Executive summary:

  • The gold and silver (GLD & SLV) have been under a secondary reaction since 7/18/23.
  • The current secondary reaction notwithstanding, the primary trend for gold and silver remains bearish.

 General Remarks:

In this post, I thoroughly explained the rationale behind my use of two alternative definitions to appraise secondary reactions.

GOLD AND SILVER

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

I explained HERE that gold and silver have been in a primary bear market since 6/21/23.

On 6/22/23, SLV reached a temporary bottom, while GLD did the same on 6/29/23. Following these lows, a rally ensued until 6/22/23 (SLV, 18 days) and 6/20/23 (GLD, 12 days), satisfying the time requirement for a secondary reaction. In terms of extent, as demonstrated in the table below, both ETFs significantly exceeded the Volatility-Adjusted Minimum Movement (for further explanations about VAMM, here). Altogether, the conditions for a secondary reaction have been met.

Now, we are confronted with three potential outcomes:

a) Once the ongoing pullback surpasses the Volatility-Adjusted Minimum Movement (VAMM) - you can find more information about VAMM here- the conditions for a new primary bull market would be fulfilled.

b) If the pullback does not reach the VAMM, and both ETFs continue to climb higher, breaking above the last recorded market highs (GLD: 5/4/23 @ 190.44 and SLV: 23.94), a primary bull market would also be signaled. This alternative signal has been extensively discussed in the past (examples HERE & HERE).

c) If both ETFs drop below the closing lows of 6/29 (GLD) and 6/22/23 (SLV), the primary bear market would be reconfirmed, and the current secondary reaction would come to an end.  

The charts below aid in visualizing the present situation. The blue horizontal lines highlight the peaks of the last recorded bull market (letter "b" above). A confirmed breakthrough of these lines would signal a new primary bull market. On the right side of the charts, the blue rectangles represent the current secondary reaction, while the grey rectangles depict a pullback that did not meet the extent requirement to establish the ETFs for a primary bull market.


B) Market situation if one sticks to the traditional interpretation demanding at least three weeks of movement to declare a secondary reaction. 

As I explained HERE, the primary trend was signaled as bearish on 6/21/23.

The latest rally has not persisted for a minimum of 15 confirmed trading days, leading to the absence of a secondary reaction.

Consequently, both the primary and secondary trends remain bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Thursday, July 20, 2023

Dow Theory Update for July 20: Heretical Interpetations of the Dow Theory (II)

 

Not everything promoted as "Dow Theory" is the correct Dow Theory

In four past posts (here, here, here, and here I debunked what I believe are incorrect and underperforming interpretations of the Dow Theory. The Dow Industrials' newer highs have sparked claims from various "Dow Theory experts" that a new Bull market has emerged, which implies that all of them consider that on July 2023 we were still in a bear market. Lo and behold! I will not give names, as I despise the sin but not the sinner. Google alerts have been rife with “Dow Theory” news of late.

So, what do I consider to be “heretical” (or “plain wrong”)?

Higher highs in July 2023 by the Dow Industrials prompted many market observers to proclaim that a Buy signal (a new bull market) had been triggered. The issue is that many don’t agree as to what highs are relevant. Some talked about the 2023 highest highs being taken out. Others said that the relevant highs to penetrate were the 11/30/22 highs. So, to start with, there is ample disagreement as to what constitutes a relevant high. As a reminder, sound Dow Theory has it that the last closing highs that precede the onset of a secondary reaction (pullback) are the relevant highs to be pierced. 52-week highs and monthly highs (I have also seen this in the past ) are irrelevant to the Dow Theory and misleading.

Hence, to signal a new bull market, we need the last recorded highs (those that preceded the start of the secondary reaction) to be broken topside. It does not matter whether they are just 20 days or 2 years away. This is precisely what makes the Dow Theory so adaptive to the market environment.

However, irrespective of the right highs to be considered, all of them were wrong because the “classical” Dow Theory buy signal was triggered on 11/8/22 and was 14.31% lower than the S&P500 levels on 7/17/23. Of course, being so late in discerning the buy signal will inevitably result in underperformance. No wonder the Dow Theory is often blamed for being late.

Now, let's explore the proper way to apply the Dow Theory and how we became bullish (and invested) when everyone was still bearish.

Following the 9/27/22 lows for the Dow Transportation at 11,999.40 and 9/30/22 for the Dow Industrials at 28,725.51 (Step #1 in the Table below), there was a solid rally until 10/28/22 (Dow Industrials) and 10/31/22 (Dow Transportation) (Step #2) which qualified as a secondary reaction (three or more weeks & >= 3% confirmed). A pullback followed until 11/3/22 at 32,001.25 (Dow Industrials) and 11/2/22 at 13,094.43 (Dow Transportation), which completed the setup for a potential BUY (Step #3).

On 11/7/22, the Dow Transportation broke topside its 10/31/22 bounce highs (Step #2), and on 11/8/22, the Dow Industrials confirmed (Step #4), triggering the new Buy signal.

The Table below contains all the price action that unfolded from the September market lows (Step #1) until the final breakup (Step #4).


 The chart below illustrates the data from the table above. After the bear market lows in September (Step #1), a rally ensued, satisfying the requirements for a secondary reaction: 15 or more trading days of advancing prices and >=3% on both Indexes (Step #2, blue rectangles). Following this, a pullback (Step #3) exceeding 3% on at least one Index completed the setup for a Buy signal.

The confirmed breakout of the secondary reaction highs (Step #2) triggered the BUY on 11/8/22. The last highs were on 11/30/22 @34,589.77 for the Dow Industrials and on 2/2/23 @ 15,640.70 for the Dow Transportation. Subsequently, a new pullback qualifying as a secondary reaction unfolded.

On 7/10/23, the Dow Transportation surpassed its 2/2/23 highs, and the Industrials followed suit on 7/18/23, reaffirming the "old" 11/8/22 BUY and bullish situation. However, there was no new bull market or Buy signal on 7/18/23.

The same mistakes were made during the bear market that I signaled on 2/22/22, and several months later, many Dow Theorists proclaimed that the bear market was triggered when it was nearing exhaustion (see this post).

This article written by Jack Schannep several years ago, provides insight into the negative impact on performance caused by errors in interpreting the Dow Theory.

In any instance, what I have been discussing above is the “classical” Dow Theory. It works, it outperforms, and notably, it reduces drawdowns, as I explained here. You can find the complete “classical” Dow Theory record, which has been verified in "Technical Analysis of Stock Trends," 8th Edition, by W.H.C. Basseti (pages 49-51). The record can be accessed here: https://thedowtheory.com/resources/traditional-dow-theory/complete-dow-theory-record/

 

However, there is an even better Dow Theory “flavor”: The Dow Theory for the 21st Century crafted by Jack Schannep. He's taken this time-tested theory to new heights by adding a third Index (the S&P500) and shortening secondary reaction time, resulting in an ultra-responsive version with reduced drawdowns and solid outperformance against Buy & Hold. So, what about the trend when appraised by the Dow Theory for the 21st Century (aka. Schannep’s Dow Theory)? It is also bullish (and from a long time ago, too). On June 30th, our portfolio was up by +11.4%.

Yet more: We are now targeting 5% p.a. outperformance with our just launched Dow Theory-based ETF trading system, as explained here.

Do you want to know more? Become a Subscriber, and you’ll get access to a wealth of information (i.e., access to our Letters since 1962 and their concomitant trade recommendations, the power of the consumer confidence report as a timing device, the special report about the yield curve, how to calculate profit objectives that work, and much more). More importantly, you’ll be punctually updated through our email service of any change in trends and the specific ETFs making up our Dow Theory on steroids portfolio. Not accidentally, our Newsletter has consistently been ranked among the top investments Letters.

Sincerely,

Manuel Blay

Editor of thedowtheory.com