Wednesday, February 8, 2023

Dow Theory Update for February 8: Are bonds heading south again?

U.S. bonds at crossroads


I will analyze U.S. bonds with Dow Theory lenses in this post, as usual, but I will also comment on some obvious patterns unfolding in the charts.

Despite the strong rally that started around the end of October 2022, the primary trend remains bearish. Such a rally is merely a correction within a still-existing bear market.

The charts below show a trendline (deep blue) that defined the boundaries of the bear market swing. As you can see, TLT broke up decisively above such a trendline on 11/23/22. IEF broke up on 1/6/23. While such a breakup could be considered bullish at first glance, it does not say technically much. What happens after the breakup is what matters. If following the breakup, a pullback ensues and the breakup highs are broken up, this is bullish. If confirmed by the two charts, even more bullish. We can see that until now, TLT and IEF have not managed to break topside their breakup closing highs (green horizontal lines). So, I continue seeing a bearish trend.

So, what does the Dow Theory say?

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. As I explained here, such a rally qualifies as a secondary (bullish) reaction against the bearish trend. The pullback that followed lasting >=2 trading days and, with enough extent, set up both ETFs for a potential primary bull market signal.

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. IEF broke topside such highs unconfirmed by TLT. So, no primary bull market was signaled. Lack of confirmation makes IEF’s breakup suspect and increases the odds for lower prices (higher interest rates) in the days ahead.

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 green 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. The blue horizontal lines highlight the final top made after the breakup of the bearish trendline (while not Dow Theory are relevant price levels on the charts). For TLT, the green and blue lines start on the same day: 12/7/22.


Below a close-up: 

All in all, a breakup by TLT above its 12/7/22 closing highs, confirming IEF’s breakup, would signal a new primary bull market. If IEF managed to break up above its 1/18/23 closing high, it would further strengthen the primary bull market signal. However, a failure of TLT to break topside its 12/7/22 highs soon would increase the odds for a new bear market leg.   

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. Please mind: Almost 1.5 years in cash or short. 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 trend is bearish, the secondary trend is bullish and the setup for a potential primary bull market signal has been completed.


Manuel Blay

Editor of


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