Dow theory Update for April 5st: Back to divergent interpretations of the Dow Theory

Trends unchanged for US stocks, gold, silver and their miners

Cervantes’ master piece “Don Quixote of la Mancha” starts as follows:

“In a village of La Mancha, the name of which I have no desire to call to mind, there lived not long since one of those gentlemen that kept a lance in the lance-rack….”

Well, there is also one Dow Theorist, “the name of which I have no desire to call to mind” who persistently seems to misapply the Dow Theory. No need to give names.

That Dow Theorist has recently penned that a bull market will not be signaled until the Industrials and Transports better the last recorded all-time highs. He also notes that the Transports are well below such all-time highs.  Well, this interpretation of the Dow Theory is plainly wrong. As an aside, both Schannep’s and my interpretation of the Dow Theory signaled a primary bull market signal on April 1^st. 2019, as was explained here.

Here you have an updated chart (concerning the “Rhea/classical” Dow Theory). The red horizontal lines display the secondary reaction highs which were jointly broken up on April 1^st, 2019. On the other hand, the green horizontal lines display the alleged level to be penetrated so that a primary bull market is signaled as per the reading of that Dow Theorist. Such green lines display the last recorded all-time highs which hitherto have not been broken up by neither the Industrials (top chart) nor the Transports (bottom chart).

 

Red horizontal lines display the "normal" more timely bull market signal. The thick green lines display the last primary bull market highs

No wonder the Dow Theory gets a bad rap if people claiming to apply the Dow Theory apply it badly. Waiting for all-time highs to be exceeded is incorrect application of the Dow Theory and ignores that according to Rhea one can glance three alternative primary bull market signals.

1)     The first one (and normally occurring first) the typical secondary reaction against the primary bear market, pullback, and confirmed penetration of the secondary reaction closing highs. This is the signal we got last April 1^st.

2)     Absent a pullback following the secondary reaction, breaking up the last completed (the previous one) secondary reaction is an alternative entry level.

3)     Absent “1” and “2” the last recorded primary bull market highs serve as the stopgap, last resort, primary bull market signal. 

Ignoring “1” and “2” signals is tantamount to belatedly signaling a primary bull market when the risk/reward of the trade concerned is no longer so good. There is less upside (reward) and much more downside (risk). As an aside, this is why Schannep’s Dow Theory by being more reactive has a better risk profile than the “Rhea/classical” Dow Theory.

Here you have a “pedestrian” chart of my own which displays the three alternative entries. Of course, waiting for the last one (highs of the last primary bull market) in order to consider a change of trend is plainly wrong. It would only be right if no signals “1” and “2” occur first. 

Three alternative primary bull market signals

By the way, some weeks ago, I criticized some Dow Theorists for their failure to timely detect the change from bull market to bear market. That post served to clarify the alternative signals. Here you have the relevant post, which also serves to help understand the present post (both are the two sides of the same coin. The past post concerning the calling of a primary bear market, and the present one concerning the calling of a primary bull market).

In such a post, I mentioned that by being late signaling the primary bear market 4.5% was lost due to overstaying. By the same token, waiting until the last primary bull market highs are broken up may imply an additional loss (gains which are not made) of ca. 5-10%. Thus, if you add up the points lost by exiting too late and the gain lost by having a belated entry, you can see the importance of proper timing.

Hence, readers of this blog beware: Not all signals given in the name of the “Dow Theory” are to be believed as being the best “Dow Theory”. Discern.

Sincerely,

The Dow Theorist.

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