If TLT confirms IEF's breakup, a primary bull market in US bonds will be signaled
I am writing before the close, so things might change. Readers, as always, do your own homework.
US STOCKS
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GOLD AND SILVER
A) Market situation if one is to appraise secondary reactions not bound by the three weeks dogma.
While it’s subject to interpretation, I explained why I consider the primary trend bullish since 4/21/2021 here.
The secondary trend is bullish too.
B) Market situation if one sticks to the traditional interpretation demanding more than three weeks of movement in order to declare a secondary reaction.
The primary trend was signaled as bearish on 11/27/2020, as was explained here.
Off the 11/30/2021 bear market lows both SLV and GLD rallied for 24 trading days until 1/5/2021. So the time requirement was more than met. As to the extent requirement, it was fully met. Both percentage-wise, as in terms of retracements of the previous bear market swing which started on 11/6/2020. Please spare me the calculations as the chart patterns speak for themselves.
So the secondary trend is bullish (secondary reaction against the primary bear market).
If we stick to a very strict (or rather misguided) interpretation of the classical Dow Theory, the change of the primary trend from bearish to bullish will occur if either one of the two alternatives below materializes:
1. The first one, entails the breakup of the last secondary reaction closing highs (1/5/2021). SLV broke them up on 2/1/2021, unconfirmed by GLD. So, once GLD broke up its 1/5/2021 secondary reaction highs, it’d be indisputable that the primary trend has turned bullish.
2. The second one entails the breakup of the highs of the last completed secondary reaction (the first one of the current bear market). I have written profusely (i.e., here and here) about the importance of the highs/low of the last completed secondary reaction (not the current one, but the previous one). The closing highs of such a reaction were made on 11/6/2020 for both SLV and GLD. On 12/7/2020, SLV broke up above its closing highs, unconfirmed by GLD. Once GLD confirmed, the primary trend would be bullish.
GOLD AND SILVER MINERS ETFs
A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.
The primary and secondary trend is bullish since May 7th, 2021, as explained here.
B) Market situation if one sticks to the traditional interpretation demanding more than three weeks of movement in order to declare a secondary reaction.
The primary and secondary trend is bullish since May 7th, 2021, as explained here.
Overview:
The spreadsheet below displays the primary trend in the pairs SLV/GLD and SIL/GDX when we appraise them with either the “shorter-term” or longer-term interpretation of the Dow Theory. Red color displays a primary bear market (cash), and blue displays a primary bull market.
US INTEREST RATES
General Remarks:
In this post, I provided a thorough explanation concerning 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 TLT 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 is to appraise secondary reactions not bound by the three weeks and 1/3 retracement dogma.
The primary trend was signaled as bearish on October 5th, 2020, as was explained in-depth here.
None of the small rallies that developed after the primary bear market signal resulted in a secondary reaction. On 3/18/2021, both TLT and IEF made a lower confirmed low, so the primary bear market was reconfirmed.
Off its 3/18/2021 bear market lows, TLT rallied for 19 trading days until 4/15/2021. Off its 3/31/2021 bear lows, IEF rallied for 10 trading days until 4/15/2021. In my post of April 16th, 2021, I considered the rally to be long enough time-wise to be qualified as a secondary reaction. The extent requirement was also met.
The final high was jointly made on 4/22/2021, implying a rally of 25 trading days for TLT and 15 days for IEF. Hence, there are no doubts whatsoever as to the existence of a secondary reaction.
Following the 4/22/2021 highs TLT and IEF declined until 5/12/2021. As you can see in the table below, TLT declined -5.79% and IEF -2.14%. Both declines exceed the minimum volatility-adjusted movement.
The pullback which lasted 14 trading days on both ETFs set up TLT & IEF for a primary bull market signal. So now we have two distinct outcomes for US Bonds:
a) Either the 4/22/21 closing highs are jointly broken up, which would signal a primary bull market and likely lower interest rates, and with it, the likelihood of tamed inflation. On 5/25/2021 IEF broke topside its 4/22/21 highs unconfirmed by TLT so no signal has been given.
b) or, the 3/18/21 (TLT) and 3/31/21 (IEF) closing lows get jointly broken down, which would reconfirm the primary bear market, thereby increasing the odds for higher interest rates (lower bonds) and inflation.
We know that commodities are in a bull market, suggesting inflation is coming. However, the Dow Theory alerted us a long time ago when on October 5th, 2020 a primary bear market (so higher interest rates, normally associated with bullish commodities) was signaled. Please mind that at that time, the prevailing talk was about negative interest rates. So, bonds gave us a timely warning as to the possibility of higher inflation. It would not surprise me that right now bonds are going to let us know whether inflation is here to stay (lower bonds, breakdown) or we are getting a respite (breakup, higher bonds). We will soon know.
Here you have the updated charts:
 |
| IEF (bottom chart) broke up above its secondary reaction high unconfirmed by TLT (top chart). No primary bull market yet |
B) Market situation if one sticks to the traditional interpretation demanding more than three weeks and 1/3 confirmed retracement in order to declare a secondary reaction.
The primary trend is bearish since January 6th, 2021, as was explained here.
I considered the secondary trend as bullish since 4/15/2021 as a “line” was broken up by TLT and IEF.
In the meantime, even when one demands at least 15 trading days for a secondary reaction, the time requirement for a secondary reaction was met (see more details above under letter “A”). However, if we strictly demand the 1/3 retracement of the previous bear swing as “classical” Dow Theorists do (in my opinion misinterpreting Rhea), the rally off the 3/18/21 (TLT) and 3/31/21 (IEF) closing lows has not retraced 1/3 of the bear swing that got started on 8/4/2020 (last bull market highs). So, if I go “classical” and “inflexible”, we don’t have a secondary reaction yet.
However, it is beyond dispute that a line formed and that the line was jointly broken up. It’s also indisputable that the breakup of a line entails, according to Rhea, at least, a movement of secondary proportions. Thus, given that I consider the secondary trend as bullish and given that following the 4/22/2021 highs a significant pullback occurred (see more about it above “A”), I consider that the setup for a primary bull market signal has been completed. You’ll find an in-depth study about lines and how we can use them to derive primary bull (bear) market signals here.
As with the “shorter-term” interpretation of the Dow Theory, now we have two possible outcomes:
a) Either the 4/22/21 closing highs are jointly broken up, which would signal a primary bull market and likely lower interest rates, and with it, the likelihood of tamed inflation. On 5/25/2021, IEF broke topside its 4/22/21 highs unconfirmed by TLT, so no signal has been given.
b) or, the 3/18/21 (TLT) and 3/31/21 (IEF) closing lows get jointly broken down, which would reconfirm the primary bear market, thereby increasing the odds for higher interest rates (lower bonds) and inflation.
Here you have the updated charts:
Sincerely,
Manuel Blay
Co-Editor of thedowtheory.com
