Dow Theory Alert: The trend for US bonds could change from bearish to bullish soon. Learn the critical price levels to watch

From Bearish Trends to Potential Bull Markets: TLT and IEF Insights

Overview: TLT and IEF remain in a primary bear market, but this could change soon. If TLT and IEF jointly surpass their 5/15/24 closing highs, the trend will shift from bearish to bullish. More details are provided below.

General Remarks:

In this post, I extensively elaborate on the rationale behind employing two alternative definitions to evaluate secondary reactions.

TLT refers to the iShares 20+ Year Treasury Bond ETF. You can find more information about it here

IEF refers to the iShares 7-10 Year Treasury Bond ETF. You can find more information about it here.

TLT tracks longer-term US bonds, while IEF tracks intermediate-term US bonds. A bull market in bonds signifies lower interest rates, whereas a bear market in bonds indicates 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 in this post, the primary trend for TLT and IEF was signaled as bearish on 2/13/24.

TLT and IEF drifted downward until 4/25/24. From these lows, a bounce lasting 14 trading days followed until 5/15/24. The table below shows that the rally met the time and extent requirements for a secondary (bullish) reaction against the primary bearish trend. After the 5/15/24 bounce highs, there was a pullback until 5/29/24, completing the setup for a potential primary bull market signal.

 

Now, we have two alternatives:

a) If TLT and IEF jointly surpass their 5/15/24 closing highs (Step #2 bounce), a primary bull market will be signaled.

b) If TLT and IEF jointly violate their 4/25/24 closing lows (Step #1), the primary bear market would be reconfirmed.

The charts below depict the current market situation. The grey rectangles on the left show a rally that occurred in March that did not qualify as a secondary reaction. The blue rectangles (Step #2) highlight the current secondary (bearish) reaction against the primary bear market. The brown rectangles show the most recent pullback that set up both ETFs for a potential primary bull market signal. The blue horizontal lines highlight the bounce highs (step #2). The red horizontal lines highlight the primary bear market lows whose breakdown would reaffirm the primary bear market. 

 

Thus, the primary is bearish, and the secondary one is bullish.

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 detailed in this post, the primary trend was signaled as bearish on 2/13/24.

The most recent bounce, not reaching the >=15 days threshold, does not qualify as a secondary reaction, and accordingly, no setup for a potential primary bull market signal has been completed.

Therefore, the primary and secondary trends are bearish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com