Dow Theory Signals Bull Market for Bonds on 6/4/24: Recession or Soft Landing?

Manuel Blay

Dow Theory Signals Bull Market for Bonds on 6/4/24: Recession or Soft Landing?

US Bonds Turn Bullish: What’s Next for the Economy?

Overview: When appraised by the more reactive application of the Dow Theory, the trend of US bonds turned bullish on 6/4/24. The question is: Is the bond market discounting a recession or merely a soft landing resulting in lower inflation?  The unemployment rate for May, to be published on 6/7/24, will probably give us more clues, as well as oil, if it maintains its bearish trend.

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 

The primary trend shifted to bullish on 6/4/24 when TLT and IEF jointly surpassed their 5/15/24 closing highs.

You may read more about the setup that preceded the new primary bull market signal in my 6/3/24 post.

The table below displays the price action that led to the new bull market signal.

197 table dow theory short term June 4 2024

So, now the primary and secondary trends are bullish.

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), whose breakup signaled the new bull market. The red horizontal lines highlight the primary bear market lows whose breakdown would signal a new primary bear market.

198 TLT IEF dow theory SHORT term June 6 2024 edited

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.

TLT and IEF drifted downward until 4/25/24 (Step #1 in the table below). From these lows, a bounce lasting 28 trading days followed until 6/5/24 (Step #2). The table below shows that the rally met the time and extent requirements for a secondary (bullish) reaction against the primary bearish trend. Now, we wait for a >=3% pullback to complete the setup for a potential primary bull market signal.

197 table dow theory long term June 6 2024

 

The charts below depict the current situation. The blue rectangles highlight the present secondary (bullish) reaction against the primary bear market.

198 TLT IEF dow theory long term June 6 2024 EDITED

Therefore, the primary trend is bearish and the second one is bullish.

Sincerely,

Manuel Blay

Editor of thedowtheory.com

 

 

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