Overview: On 2/13/24, January’s Consumer Price Index
(CPI) exceeded expectations, triggering significant market upheaval.
The Headline CPI saw a 0.3% month-over-month increase compared to the
previous month’s 0.2% rise.
This unexpected development led to widespread turmoil:
- Stocks plummeted.
- Precious metals and their mining stocks declined.
- U.S. treasuries experienced substantial drops amid concerns over
higher inflation and the likelihood of delayed interest rate cuts.
While U.S. stock indexes are far from a bear market, the adverse news
on February 13th, 2024, pushed precious metals and bonds into new bear
market territory.
In my 2/6/24 post titled “Gold’s downturn? Dow Theory Signals Market Risks Ahead”
I accurately alerted of a potential shift to a bearish trend in
precious metals. As is often the case, price movements tend to precede
news, so weakness was already evident before the bad CPI print.
The precious metals market is currently experiencing a significant bearish bias.
The long-term assessment of the Dow Theory remains bearish, and SLV’s
non-confirmation of GLD’s higher highs on December 27th, 2023, is a
yellow flag (or even a reddish one). Furthermore, the short-term
assessment of the Dow Theory (see below) shifted to bearish on February
13th, 2023, which adds more weight to the bearish case.
General Remarks:
In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.
GLD refers to the SPDR® Gold Shares (NYSEArca: GLD®). More information about GLD can be found HERE.
SLV refers to the iShares Silver Trust (NYSEArca: SLV®). More information about SLV can be found HERE.
A) Market situation if one appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.
As I explained in this post, the primary trend was signaled as bullish on 11/27/23.
Following a pullback (secondary reaction against the bullish trend),
both TLT and IEF experienced a bounce, setting up both ETFs for a
potential primary bear market. You can find detailed explanations and
charts HERE.
The table below furnishes relevant information:
On 2/13/24, GLD and SLV broke down below their 2/1/24 pullback lows
(Step #2). Since it was a confirmed breakdown, a primary bear market was
signaled according to the Dow Theory.
Check out the chart below for a visual walkthrough of the recent
price action. The brown rectangles highlight the secondary reaction
(Step #2), the blue rectangles showcase the rally (Step #3) originating
from the secondary reaction lows that set up both ETFs for a potential
bear market signal, and the red horizontal lines pinpoint the pullback
lows whose joint violation signaled the new “bear market.” The blue
horizontal lines highlight the last recorded primary bull market highs
(Step #1), whose breakup would signal a new primary bull market.
Thus, both the primary and secondary trends are currently bearish.
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.
As I explained HERE, the primary trend was signaled as bearish on 6/21/23.
Following the bear market lows on 10/5/23, there was a strong bounce
until 12/1/23, which qualifies as a secondary reaction against the bear
market given that both the time (at least 15 days confirmed) and extent
requirements were met.
The extent requirement demands that both ETFs rally more than the
Volatility-Adjusted Minimum Movement (VAMM). You can get more
information about the VAMM HERE.
After the bounce highs (Step #2), a pullback ensued until 12/12/23.
This pullback exceeding the VAMM and lasting >=2 days set up GLD and
SLV for a potential primary bull market signal. If GLD and SLV jointly
broke topside their 12/1/23 closing highs, a primary bull market would
be signaled. On 12/27/23, GLD surpassed its 12/1/23 secondary reaction
highs (Step #2), unconfirmed by SLV. One of the Dow Theory tenets
is that we need confirmation for a signal to be given. In the absence
of confirmation, no new primary bull market was signaled.
The table below shows the key dates and prices:
So, now we have the following options:
- Should SLV experience a rally and surpass its closing highs from
December 1st, 2023, it would provide confirmation, signaling a new
primary bull market. However, considering the absence of sudden price
surges, this possibility seems improbable in the foreseeable days or
weeks.
- Alternatively, if GLD and SLV continue to decline and breach their
bear market lows from October 5th, 2023, three outcomes would arise:
a) The secondary reaction against the bear market would be canceled.
b) The setup for a potential primary bull market would be nullified, too.
c) The primary bear market would be confirmed.
Explore the chart below for a visual representation of recent price
movements. The blue rectangles denote the secondary reaction (Step #2)
originating from the October 5th, 2023, bear market lows (Step #1). The
brown rectangles indicate the pullback (Step #3) after the latest market
highs (Step #2). The secondary reaction highs (Step #2) are highlighted
by blue horizontal lines, whose confirmed breach would signal a new
primary bull market (currently highly improbable). Lastly, the red
horizontal lines represent the October 5th, 2023, bear market lows (Step
#1), whose confirmed penetration would reconfirm the ongoing bear
market.
Sincerely,
Manuel Blay
Editor of thedowtheory.com