Dow Theory Update for October 21: Secondary reaction against the primary bear market in precious metals and their ETF miners

Primary trend for US bonds bearish when one appraises the trend with a longer-term view

 I am writing before the close, so things might change. Readers beware.

GOLD AND SILVER

 

In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

The primary trend was signaled as bearish on 8/6/2021, as was explained here.

 

There was a secondary reaction (explained here) that fizzled out. GLD and SLV made lower lows, and the primary bear market was reconfirmed, concluding the secondary reaction. 

 

 On 9/21/2021, SLV and GLD made their hitherto last recorded closing lows. A rally developed that qualifies as a secondary reaction, as both the time (11 days) and the extent requirement has been fulfilled. The Table below contains all the details:

 

Following the 10/14/2021 highs, there was a mini pullback lasting two days that did not meet the Volatility-Adjusted Minimum Movement (VAMM) on at least one ETF. Thus, the setup for a primary bull market signal was not completed. Accordingly, the confirmed breakup of the 10/14/2021 closing highs would not entail a bull market signal.

 

However, we have an alternative primary bull market signal: The highs of the last completed secondary reaction, namely the purple rectangles you see in the middle of the charts. This alternative entry/exit saved our bacon many times over (by exiting before it was too late or getting in before the market ran ahead of us). This post explains in-depth all the alternative bull market signals. The reverse is true for bear market signals.

 

Below the updated charts. The purple rectangles display the two secondary reactions that developed since the primary bear market was signaled. On the right side of the charts, you’ll find the current one, and the previous one on the middle of the charts. The small grey rectangles on the right side of the charts display the most recent pullback that failed to set up SLV  and GLD for a primary bull market signal. The purple ellipses show daily divergences. The blue horizontal lines extending the closing highs of last completed secondary reaction display the price levels to be jointly broken up for a primary bull market to be signaled. 

 

 

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

 

The primary trend was signaled as bearish on 11/27/2020, as was explained here.

 

The primary bear market was reaffirmed on 9/17/2021, as was explained here.

 

The rally off the 9/29/2021 closing lows has not met the time requirement (at least 15 confirmed days), so no secondary reaction has been signaled. 

 

GOLD AND SILVER MINERS ETFs

 

No time to write about them today. Just a short update.

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

 

 The primary trend was signaled as bearish on 8/9/2021, as was explained here.

 

There was a secondary reaction against the primary bear market, as was explained here.  The secondary reaction was canceled by lower lows made by SIL and GDX. Off the 9/21/2021 closing lows there was a rally that qualifies as a newer secondary reaction. There has been a mini pullback that was not enough to set up SIL and GDX for a primary bear market signal. 

As with GLD and SLV, a confirmed breakup of the highs of the last completed secondary reaction (9/3/2021) implies a primary bull market signal.

 

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

 

The primary trend was signaled as bearish on 8/9/2021, as was explained here.

 

Off the 9/21/2021 closing lows until 10/20/2021, there was a rally that qualifies as a secondary reaction.

 

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 IEF 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 appraises secondary reactions not bound by the three weeks and 1/3 retracement dogma.

 

The primary trend and secondary trend were signaled as bearish on 9/28/2021, as was explained here.

B) Market situation if one sticks to the traditional interpretation demanding at least three weeks and 1/3 confirmed retracement to declare a secondary reaction.

 

The primary trend was signaled as bullish on 6/8/2021, as explained here.

 

TLT made its last highs on 7/19/21. IEF made its previous closing high on 8/3/21 unconfirmed by TLT (non-confirmation was a warning as to a likely change of, at least, the secondary trend). TLT declined for 18 trading days until 8/12/21 and -3.44%. IEF declined for just 7 days until 8/12/21 and -1.36%. The pullback for both ETFs exceeded the Volatility-adjusted minimum movement (VAMM). However, if we apply the “traditional” (and in my opinion, misguided) interpretation of the Dow Theory, we could not declare a secondary reaction given that the pullback did not reach at least 15 trading days on a confirmed basis.

 

Furthermore, the pullback that began on the last until the 8/12/21 closing lows retraced less than 1/3 of the previous bull market swing (the one that started on 3/18/21 for TLT and 4/1/21 for IEF).

 

However, and this pertains to the “traditional” interpretation of the Dow Theory, I see on the charts a “line” that formed between 8/13/21 and 9/3/21. Such a “line” was broken downside on 9/7/21 by both TLT and IEF. By itself, the breaking down of such a line could be construed as a bearish secondary trend (see this important post for more details as to how I equate the breakdown of a line with a secondary reaction for trading purposes).

The decline that followed the breakdown of the “line” made its low on 9/7/2021. From such a low, there was a rally. TLT broke topside on 9/14/2021 its 8/20/2021 line closing highs unconfirmed by IEF. On 9/22/2021, TLT broke up above its 7/19/2021 bull market highs once again unconfirmed by IEF. Not a good omen.  

 

To add insult to injury, divergences (one ETF closing up whereas the other closed down) piled up. Such divergences occurred at relative tops on 8/4/21 and, more importantly, 8/20/21. On 9/1/21, there was a minor divergence (TLT close up and IEF down). Please remember that we successfully called the top for precious metals in August 2020 by observing several divergences that popped up on the rally leading to the top. Divergences, when properly applied, help us spot likely changes in the trend. As a reminder, the word “divergence” has three alternative technical meanings and contexts -more about them in our August 1^st  2021 Letter to Subscribers.

 

If we focus on the rally that started off the 9/7/2021 closing lows, we’ll see that it lasted more than two days, and if you do the math, you’ll see that both ETFs rallied more than the VAMM (more about VAMM here). Hence, I can safely consider that the setup for a primary bear market signal was completed. Aggressive Dow Theorists could validly consider that the 9/7/2021 closing lows were the lows to be broken downside for a primary bear market to be signaled. More conservative Dow Theorists might consider the 8/12/2021 closing lows as the price levels to be jointly penetrated for a primary bear market signal to be signaled. I personally took the latter option.

 

The charts below display the price action:

 

 

THE SECULAR TREND FOR TLT & IEF COULD CHANGE

In my previous post, I mentioned that a joint violation of the 3/19/2021 closing lows on the weekly bars charts would end the current secular bull market and signal the start of a secular bear market. As of this writing, both TLT and IEF are not far from their 3/19/2021 closing lows.

 

The table below summarizes the price action from the last recorded secular bull market highs until now. You can see that as per the Dow Theory, a clear setup for a potential secular bear market signal has been completed. Please mind that the VAMM has been adjusted for weekly bars (5 trading days). Hence we require a higher value (namely the square root of 5 times the daily VAMM) for a movement to be meaningful.

 

 

Below the updated charts. The orange rectangles display the secondary reaction against the secular bull market, whereas the blue rectangles show the rally that set up both ETFs for a secular bear market signal. The red horizontal lines display the price levels to be jointly broken down for the secular bear market to be signaled.

  

Sincerely,

Manuel Blay

Co-Editor of thedowtheory.com

 

 

 

Dow Theory Update for October 11: Primary bear market for US bonds signaled on 9/28 when one takes a shorter-term view

 

US bonds are reaching a critical level when one appraises the secular trend with weekly bars

 

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 IEF 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 bullish on 6/8/2021, as explained here.

 

On 9/29/21, I briefly explained that the primary trend turned bearish on 9/28/2021. Today I provide an in-depth explanation of the current bear market signal. 

 

TLT made its last highs on 7/19/21. IEF made its previous closing high on 8/3/21 unconfirmed by TLT (non-confirmation was a warning as to a likely change of, at least, the secondary trend). TLT declined for 18 trading days until 8/12/21 and -3.44%. IEF declined for just 7 days until 8/12/21 and -1,36%. The pullback for both ETFs exceeded the Volatility-adjusted minimum movement (VAMM).

 

At the 8/12/21 closing lows, it was not clear whether the pullback could qualify as a secondary reaction or not. While I am flexible when appraising secondary reactions when not bound by the “three weeks dogma”, 7 days for IEF is a little bit too short. While I accepted pullbacks as short as 7 trading days in the past, it is true that the less time available, the more extent (percentage move) I demand. In the present case, neither ETF had a sizeable movement. It was above the VAMM but certainly nothing resembling the volatility experienced by TLT and IEF in March 2020 when I declared the existence of a secondary reaction with just 7 days.

 

Readers of this blog know that my rule of thumb is that the more “extent”, the less “time” I require. So in the present instance, a mild decline lasting only 7 days for IEF made me wait for ensuing price action to declare the existence of a secondary reaction. As an aside, Rhea in many cases did not proclaim the existence of a secondary reaction based on the last recorded lows (or highs) but waited for subsequent action (i.e., a zig-zag pattern, volume expanding on rallies, etc.). In dubious cases, what happens after the lows (highs) of the alleged secondary reaction is vital to determine whether we only have an ordinary pullback (rally) or a real secondary reaction.

Please mind that I was long TLT, so I needed to know whether a violation of the 8/12/21 closing lows was a primary bear market signal (Sell) or merely a lower low.

 

Subsequent price action was telling:

 

1. Between 8/13/21 and 9/3/21, a “line” developed that was broken downside on 9/7/21. By itself, the breaking down of such a line could be construed as a bearish secondary trend. After the joint breakdown of the line, TLT broke it topside unconfirmed by IEF, which was neutral to bearish. Therefore, the overall reading was bearish.

2. On 9/22/21, TLT bettered its 7/19/21 primary bull market closing high unconfirmed by IEF. So lack of confirmation at a previous bull market top was bearish. The very existence of the bullish primary trend was challenged.

3. There were divergences (one ETF closing up whereas the other closed down) at relative tops on 8/4/21 and, more importantly, 8/20/21. On 9/1/21, there was a minor divergence (TLT close up and IEF down). Please remember that we successfully called the top for precious metals in August 2020 by observing several divergences that popped up on the rally leading to the top. Divergences, when properly applied, help us spot likely changes in the trend. As a reminder, the word “divergence” has three alternative technical meanings and contexts -more about them in our August 1^st  2021 Letter to Subscribers.

Thus, I concluded that the pullback finishing on 8/12/21 constituted a real secondary reaction based on the above. The rally that followed such lows set up both EFTs for a primary bear market signal. On 9/7 and 9/17/21, IEF broke down below its secondary reaction 8/12/21 closing lows, whereas TLT did so on 9/28/21.

 

Below you have the table providing the relevant data.

 

 All in all, on 9/28/21, TLT, by confirming IEF signaled a primary bear market.

 

Here you have an updated chart. 

 

 

The TLT trade taken on 6/8/21 was a winner. However, we should not get too thrilled with the outcome of any given trade, as anything can happen. We need several trades for a picture of profits to emerge. When taking trades that may last on average one year or more, we need at least to wait for five years to draw meaningful conclusions, as this post and the links contained therein explain.

 

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.

 

To be explained in a future post. Time as always in short supply.

 

More important than the appraisal of the trend when one takes at least 3 weeks for a secondary reaction, is the pattern I see when one applies the Dow Theory to TLT and IEF based on weekly charts. If the 3/19/21 closing lows were jointly violated a secular bear market for TLT and IEF would be signaled. I hope to provide more details in my next post.

 

Sincerely,

Manuel Blay

Co-Editor of thedowtheory.com

Dow Theory Update for September 29th: Primary bear market signaled on 9/28/21 for US bonds

Primary bear market in precious metals reconfirmed for GLD and SLV

 

In the next few days, I plan to write an in-depth post concerning US bonds. For now, it suffices to say that on 9/28/2021, a primary bear market was signaled when one appraises secondary reactions not bound by the three weeks dogma. When one takes the longer-term view (at least three weeks for a secondary reaction to exist), the primary trend remains bullish, and we have just entered a secondary reaction.

GOLD AND SILVER MINERS ETFs

 

General Remarks:

 

In this post, I provided a thorough explanation concerning the rationale behind my use of two alternative definitions to appraise secondary reactions.

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

 

GOLD AND SILVER MINERS ETFs

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

The primary trend was signaled as bearish on 8/6/2021, as was explained here.

 

The secondary trend was signaled as bullish on 9/3/2021, as was explained here.

 

Off their 3/9/2021 secondary reaction highs, both ETFs declined. SLV broke down below its 8/20/2021 primary bear market lows on 9/16/2021. GLD broke downside its 8/9/21 closing lows on 9/29/21. Accordingly, the primary bear market has been reconfirmed, and the secondary reaction canceled. Thus, both the primary and secondary trend is bearish.

 

Below the updated table containing the relevant data:

Remark: As you can read here, my real-time application since 2012 of the Dow Theory to gold and silver yielded promising results (less drawdown and more performance than Buy & Hold). However, I would not be surprised to see even better results if we used three ETFs (i.e., GLD, SLV and GDX), as it is likely that we would have more signal and less noise. So maybe the final word about applying the Dow Theory to precious metals has not been said yet, as I aim to do even better.

 

Below updated charts. The dark blue circles or ellipses display days with divergence (one ETF closed up while the other one closed down). I always keep an eye on divergences. Depending upon context divergences may help us pinpoint the end of a move, as we did in July 2020 for precious metals). In our current juncture, all divergences popped up during rallies, thereby casting some doubt about the health of the advance.

 

 

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.

The secondary trend was bullish, as was explained here.

The secondary reaction against the primary bear market was finally ended on 9/17/21 when SLV violated its 11/30/2020 @21.05 bear market lows. By closing below such lows, SLV finally confirmed GLD, which had broken down below its 11/30/2021 bear market lows on 2/17/2021. So, the primary bear market has been reconfirmed, the secondary reaction has been terminated, and the secondary trend is now bearish.

 

GOLD AND SILVER MINERS ETFs

 

A) Market situation if one appraises secondary reactions not bound by the three weeks dogma.

 

The primary trend was signaled as bearish on 8/9/2021, as was explained here.

The secondary trend was signaled as bullish on 9/3/2021, as was explained here.

 

On 9/20/21 both GDX and SIL broke downside their 8/20/21 bear market lows, so the primary bear market was reconfirmed and the secondary reaction canceled. Accordingly, both the primary and secondary trend is bearish.

 

Here you have an updated chart:

 

 

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 8/9/2021, as was explained here.

 

Off the Bear market lows (8/20/21 @30.85 and 8/20/21 @37.44 for GDX and SIL, respectively) there was a ten trading days rally until 9/3/21 which did not qualify as a secondary reaction, since we require at least 15 days. On 9/20/21 both GDX and SIL broke downside their 8/20/21 bear market lows so the primary bear market continues. As of this writing both ETFs are flirting with newer lows.

 

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 (absent) displays a primary bull market.

 

Sincerely,

Manuel Blay

Co-Editor of thedowtheory.com