Dow Theory Update for March 28: Mini Update on U.S. Bonds

An epic battle is being fought between bulls and bears in U.S. bonds.
The primary trend has been bearish for a long time, as I explained HERE. By the end of October 2022, a secondary reaction started that topped on 12/7/22. Following a strong pullback, the ETF IEF broke topside its 12/7/22 closing high unconfirmed by TLT. On 2/2/23, TLT was about to break up above its 12/7/22 highs but missed. Such non-confirmation told us that the most likely outcome was bonds going down (interest rates up) because the primary trend was and remains bearish. Following the non-confirmation, both ETFs started heading south again. However, TLT and IEF could not pierce their October 2022 lows which would reconfirm the bearish trend. 

So, interest rates are at a crossroads now: 

1) If TLT finally takes out its 12/7/22 closing high, the primary trend would turn bullish, suggesting lower interest rates ahead (and likely the much-announced recession).

2) If TLT does not break up and both ETFs drop until the October 2022 lows are jointly pierced, the primary bear market will be reconfirmed, suggesting higher interest (and likely inflation) ahead. 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

Dow Theory Update for March 18: Divergence between the Dow Industrials and Transportation

It's been a long time without analyzing stocks on this blog. Something caught my eye on the charts which I will share with you in this post.

Robert Rhea referred to two types of divergence. Firstly, the one we observe between daily closing prices: One index closes down while the other closes up. In his book “The Story of the Averages” (1934, page 190), Rhea wrote, “when two or more days’ divergence occurs after an extended and excited primary movement, such action is frequently the first indication of a secondary reversal”. The other type of divergence is when one index makes lower highs and lower lows, whereas the other makes higher highs and higher lows. The implications of divergence depend on where we are situated in a chart. If we are near a multiyear top, the most likely implication is that the trend will turn bearish, and the divergence shows money escaping one Index to find shelter in the other one. If divergence occurs after a secondary reaction, divergence tends to show that the reaction is running out of steam. Generally, divergence, which is a stronger warning than lack of confirmation, tells us that a big move is in the making, be it “up” or “down.”

 

The charts below show that the Dow Industrials and Transportation have been seriously diverging. The Dow Industrials (top chart) has been making lower highs and lows, while the Dow Transportation has been making higher highs and lows. The total number of divergence days in the last 20 days has been 4, which is a neutral number (it can get as high as 8 or as low as 0). 

 

Thus, it seems that the next leg, be it “up” or “down,” will be decisive. For the time being, the primary trend, according to the classical Dow Theory, is bullish, and the current pullback is just a secondary reaction. 

And what about the trend when appraised by the Dow Theory for the 21st Century (aka. Schannep’s Dow Theory)? Schannep’s Dow Theory, since 1953, outperformed Buy and Hold by 3.03% p.a., with a marked reduction of both the depth and time in drawdown. Schannep’s Dow Theory achieved such an outperformance by investing only in the major indexes, which is quite a feat.

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Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

Dow Theory Update for March 17: How the Dow Theory saved me from buying a sinking ship

 The principle of confirmation matters

The Dow Theory saved my skin thanks to the principle of confirmation.  Around May 2022, I read an article that made a bullish case for the now-failed bank Silvergate. I know that most fundamental narratives have zero predictive value concerning the future stock’s performance. However, this presentation was supposedly so well-grounded that, in a brief lapse of insanity, I decided to try it.  Luckily, my technical instincts told me not to buy Silvergate until there was a breakup of a relevant pivot point (secondary reaction high) CONFIRMED by Bitcoin (the ETF GBTC).  So, I did not want to buy a falling knife, and I also wanted to buy a nascent bull trend, provided GBTC confirmed. My thought was: If bitcoin cannot make higher highs, any new trend for Silvergate is suspect. 

The charts below show that Silvergate bottomed on 7/1/22. The bounce that followed until 7/20/22 could be considered as a secondary reaction against the still-existing bear market. GBTC made its final low on 6/30/22 and rallied until 7/20/22. After such a high, there was a pullback on both assets until 7/26/22, which completed the setup for a potential Buy signal. On 8/2/22, Silvergate broke topside  its 7/20/22 closing low, UNCONFIRMED by GBTC. Given that non confirmation implies that no new trend has been born, I delayed any BUY of Silvergate, until GBTC  confirmed. Such a confirmation never happened, as both assets started heading south.

On 9/6/22, GBTC made a lower low (below its 6/30/22 closing low). Silvergate confirmed by piercing its 7/1/22 closing low on 11/2/22. Confirmed lower lows implied:

a) The primary bear market was reconfirmed.

b) The secondary (bullish) reaction against the bear market was terminated.

c) More importantly: The potential Buy was canceled, and my skin was saved, as I had not bought Silvergate and was waiting for confirmation (which never came).  

The charts below show the dramatic developments:

 

 

The rest is history: We know what happened to Silvergate. Now it trades at around $2 a share (from 94.54 on 8/2/22).

Confirmation works. We should never trade any signal based on one asset when another related one fails to confirm.  

 

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

 

 

 

Dow Theory Update for February 14: Setup for a primary bear market signal for GLD and SLV completed on 3/13/23

 

Executive Summary:

1. The primary tend for gold and silver remains bullish.

2. However, the setup for a potential primary bear market signal was completed on 3/13/23

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 bull market since 12/1/22.

A few weeks ago, I spotted three technical developments that made the ongoing rally suspect and made a secondary (bearish) reaction against the primary bull market likely. On 2/15/23, we got the expected secondary reaction (as explained HERE).

 

Following the 2/24/23 (GLD) and 3/8/23 (SLV) lows, both metals rallied on a confirmed basis for >=2 days. Such a bounce has enough extent to set up both ETFs for a potential primary bear market signal, as the rally amply exceeds the Volatility-Adjusted Minimum Movement (VAMM, more about it HERE).

The Table below gives you all the relevant data.

 

 So, now we have two options:

a) if the rally continues until the 2/1/23 (GLD) and 1/13/23 (SLV) market highs are jointly broken topside, the secondary reaction will be canceled, and the primary bull market will be reconfirmed (Step #1 in the Table above).

b) if GLD and SLV start heading south and jointly violated their secondary reaction lows (Step #2 in the Table above), a primary bear market would be signaled.

The charts below display the current situation. The brown rectangles highlight the secondary reaction against the primary bull market. The violet rectangles show the most recent bounce that set up both precious metals for a potential primary bear market signal. The blue horizontal lines highlight the last recorded primary bull market highs. The red horizontal lines show the secondary reaction lows whose violation would signal a new primary bear market.

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

I explained HERE that gold and silver have been in a primary bull market since 12/1/22. Finally, the pullback has met the time requirement for a secondary reaction as GLD declined for 16 trading days and SLV for 36 trading days. As you can see in the Table under section “A” above, the extent requirement has also been fulfilled, so there is a secondary reaction against the primary bull market. The following bounce (step #3 in the Table above) has also set up GLD and SLV for a potential primary bear market signal.

So, in this specific instance, the trend's long and short-term appraisals give the same verdict: the setup for a potential primary bear market has been completed.

Sincerely,

Manuel Blay

Editor of thedowtheory.com