I thank Alessio Rastani for featuring our opinion of the most likely performance for the stock market in 2023 after a high inflation year (2022) in his latest video.
Alessio's videos are full of good contents (no financial BS) and are highly entertaining.
https://youtube.com/watch?v=ZU8K3Pj_Ia0
Sincerely,
Manuel Blay
Editor of thedowtheory.com
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.
Sincerely,
Manuel Blay
Editor of thedowtheory.com
A correction for gold and silver in the making?
1. The USD is slowly turning bullish against the EUR.
2. U.S. bonds are again turning down (higher interest rates).
3. A couple of weeks ago, I alerted there was a glaring divergence between
silver and gold price action, which suggested, at least, some pausing:
https://lnkd.in/eU-mfibF
Result:
We got the drop I foresaw, which will likely morph into a correction. We
will know very soon.
Sincerely,
Manuel Blay
Editor of thedowtheory.com
So, what is the current trend now?
It is a primary bear market. From the 6/17/22 lows to the 8/12/22 highs, a secondary (bullish) reaction against the bear market unfolded (brown oval in the charts below). Following such lows, ETHE made lowers lows (highlighted by the breakdown of the horizontal purple line and arrow) unconfirmed by BTC. While bullish, such a lack of confirmation is not enough to change the primary trend from bearish to bullish but may be indicative of a new rally. ETHE made its final lows on 11/20/22 and joined BTC in making higher lows and higher highs since that date. The pullback that started on 8/12/22 and finished on 11/20/22 for both cryptos set up both ETFs for a new primary bull market signal. Please mind that this latest rally is not a new secondary (bullish) reaction, as the one that occurred from June to August was not canceled as no confirmed lower lows occurred.
So now we have two alternatives:
a) if the 8/12/22 highs are broken topside by BTC and ETHE, a new primary bull market will be signaled.
b) if instead, BTC broke down below its 6/17/22 lows and belatedly confirmed ETHE, the primary bear market would be reaffirmed, and the secondary reaction canceled.
The chart below displays the current situation. The light blue horizontal line highlights the 8/12/22 highs for ETHE. The deep blue line highlights the same highs for BTC. The horizontal orange line shows the 6/17/22 lows for BTC (which were not penetrated), and the purple line ETHE’s 6/17/22 low that was subsequently broken down. The brown oval highlights the secondary reaction.
So, despite all the recent bullishness about bitcoin, the charts say it is too early to call a new bull market. Furthermore, ETHE is very far from its 8/12/22 highs.
Sincerely,
Manuel Blay
Editor of thedowtheory.com
