Wednesday, May 20, 2015

Dow Theory Special Issue: A closer look at the Chinese primary bull market in stocks

Some days ago, I made a cursory reference to an ongoing primary bull market in Chinese stocks.

One reader of this Dow Theory blog kindly asked me to further analyze the bull market in Chinese stocks.

As I explained here, the Dow Theory can also be applied to foreign stocks indices and even assets other than stocks (as I do with gold and silver).

 Let’s begin with an updated chart showing you the development of the primary bull market since its inception to today.

On the top of the chart I have plotted FXI (IShs China Large Cap ETF). At the bottom of the chart I have plotted HAO (Guggenheim China Small Cap). So we have two indices that are quite related. They are similar enough and, at the same time, different enough, to be a good “dancing pair” in order to apply the Dow Theory. 

As with US debt ( ), the bull market started hesitatingly to be followed by an explosive move

The primary bull market signal was flashed on 7/3/2014 (vertical line on the left of the chart, blue arrows), when FXI confirmed the higher closing high made by HAO on 7/2/2014. The blue rectangle on the left side of the chart partially displays a secondary bullish reaction against the then existing primary bear market.  The blue rectangle on the middle of the chart displays a secondary bearish reaction against the primary bull market. HAO made a higher high (penetration of the red horizontal line, whereas FXI did not confirm. Lack of confirmation implied that we could not declare the secondary reaction as extinguished and, hence, the primary bull market had not been reconfirmed.

Next, HAO violated its secondary reaction lows several times whereas FXI did not deign to confirm. Lack of confirmation by FXI implied that no primary bear market had been signaled. So the Chinese stocks market was caught with a double non confirmation. On the one hand, there was not enough bullish thrust to re-confirm the primary bull market; on the other hand, there was not enough bearishness for a primary bear market signal to be signaled. As always, the benefit of doubt is to be given to the existing primary trend, and hence, the primary trend remained bullish during these weeks of non-confirmations. The price action of FXI and HAO reminds me the words of Market Wizard trader Minervini, who wrote in his book "Trade Like a Stock Market Wizard" that quite often explosive moves are preceded by a shake out. Lower unconfirmed lows fit quite well within the definition of a "shake out". By the way, while not strictly Dow Theory, Minervini's book contains many pearls of market wisdom. In spite of my being "Dow Theorist", technical knowledge is always welcome, especially when it comes from investors with a proven track record. While this could well deserve a future post on this Dow Theory blog, I feel many of Minervini's insights can be successfully merged with Dow Theory tenets.

Finally, on 01/21/2015 FXI broke above its last recorded primary bull market highs (red horizontal line), and hence the primary bull market was re-confirmed.

As of this writing, the primary bull market remains unchallenged. The secondary trend remains bullish too, as the decline that followed the last recorded highs has not even met the time requirement. I see that on 5/4/2015 HAO made a higher closing high which was unconfirmed (highlighted by ellipse on the right side of the chart). This might be hinting at the development of a secondary reaction. But it is too soon to tell.

So what I see on the charts is:

·        New primary bull market for the Euro (which implies weaker USD).
·        US debt on the verge of a primary bear market signal (but not there yet).
·        US Stocks have reconfirmed the primary bull market.
·        Chinese stocks under their own primary bull market as well.

More about the Euro, the USD, and USD denominated debt, here.

And, concerning, the re-confirmation of the primary bull market in US Stocks, here.

Precious metals and their miners EFTs, in spite of their being in a primary bull market, remain firmly caught in a secondary bearish reaction.

So let’s see what happens….

The Dow Theorist

Monday, May 18, 2015

Dow Theory Update for May 18: Primary bull market for US Stocks reconfirmed

 Trends unchanged in all markets.


On 5/14/2015 the SPY bettered its last recorded primary bull market closing high of 3/2/2015. Today the Industrials has confirmed by exceeding its 3/2/2015 closing high.

As per my reading of the Dow Theory, stocks did not even enter into a secondary reaction, since the lowest confirmed closing lows of the downward movement were made 03/11/2015, and the time requirement (at least 8 days of declining prices as the average of the three indices) was not met on that date. From that point, the SPY and the Industrials refused to make lower lows, and hence the lower lows of the Transports were not confirmed. All in all, we didn’t even get a proper secondary reaction, and this is why I was labeling during all these weeks the secondary trend as bullish.

Here you have the chart depicting the most recent action:

Blue horizontal lines (primary bull market highs) jointly bettered by the Industrials and SPY

So, both the primary and secondary trend remains bullish.

I know that I am slightly departing from Schannep. According to Schannep, “in the clear” signals require confirmation by the three indices. Furthermore,  the Transports are not merely non confirming but diverging (that is going down, whereas the SPY and Industrials go up). Thus, according to Schannep’s Dow Theory, the primary bull market has not been reconfirmed, and we have to wait until:

a) Either the SPY violates the last recorded secondary reaction lows.

b) Or the Transports joins the bullish parade and breaks up above the last primary bull market highs.

For practical purposes, the difference between Schannep’s interpretation and mine is that I will begin to monitor the development of a new secondary reaction from the newer higher highs. The counting of days for gauging a new secondary reaction is set to zero. Thus, a practical implication of my way of applying the Dow Theory, is that it tends to produce “narrower” Dow Theory stops, as secondary reactions are appraised in some instances earlier than under Schannep’s Dow Theory. This is neither good nor bad. It just depends on the risk tolerance and global psychological and financial make up of the investor.

More about this issue here:

Gold and Silver

The primary trend is bullish as explained here.

The secondary trend turned bearish on February 6th, 2015 (secondary reaction against the primary trend) as explained here.

The setup for a primary bear market signal was completed on March 24, 2015 as explained here.

Thus, now:

a) Either the primary bull market closing highs 01/22/2015 are bettered in which case the primary bull market will be reconfirmed.

b) Or the  secondary reaction lows are violated in which case a primary bear market will be signaled.

We have to wait and see.

Gold and Silver miners ETFs.

As to the gold and silver miners ETFs,on 3/10/15 SIL violated its 12/16/2014 primary bear market closing low. However, GDX did not confirm. As per the Dow Theory lower lows unconfirmed have no validity, and hence we cannot declare a primary bear market. Since we cannot declare a primary bear market, the primary trend remains bullish. Furthermore, the GDX and SIL staged a rally that set them up for a primary bear market signal on March 24, 2015 as explained here.

Thus, now:

a) Either the primary bull market closing highs 01/20/2015 are bettered in which case the primary bull market will be reconfirmed.

b) Or the secondary reaction lows (or the primary bear market lows of SIL, and secondary reaction lows of GDX) are violated in which case a primary bear market will be signaled.

Once again, we have to wait and see.

The Dow Theorist

Wednesday, May 13, 2015

Dow Theory Update for May 13: Is the USD bull market over?

EUR under primary bull market as per the Dow Theory. US debt just about to signal primary bear market.

Following the suggestion of Algyros, reader of this Dow Theory blog, I have made it easier for its followers to know the current state of the trend (see banner above), as far as I am able to discern it. As you can see, the calmness continues. This is what has prompted Dave Moening of the “” to write:

“One of the biggest challenges in attempting to provide daily commentary on the markets is to somehow avoid saying the same darn thing day in and day out. However, at this stage of the game it is sooo tempting to simply type, “see yesterday’s comments, and the day before that, and the day before that!”

By the way, I like the straightforward analysis of Dave.

I agree with him. This is why I am taking advantage of the lull to convey vital insights about the Dow Theory instead of babbling every day. When there is no news, there is no news. Period.

Let's talk about Forex and US debt. Two charts have caught  my eye.

In spite of all the doom and gloom concerning the Eurozone, the charts tell me that a new primary bull market for the EUR (“FXE”) has been just signaled on April 28th, 2015.

In order to avail myself of the principle of confirmation pertaining to the Dow Theory, I use as second index the Swiss Franc ETF (“FXF”). The Swiss Franc is close enough to the Euro but different enough to be a good “dancing partner” so that we can apply the Dow Theory and be sure that there is confirmation.

Here you have the chart that says it all:

The EUR took some time to confirm the CHF, but finally we got a primary bull market signal for the EUR and CHF

While nothing is carved in stone, and this can be a failed signal (a roughly 30% probability), one thing is clear to me: The odds favor upside for the Euro and downside for the USD. How much? I don’t know. Rhea was clear that nobody can predict the extent and duration of primary movements, and since there is no "dow theory track record" for forex, I´d rather withhold judgment.

Furthermore, US debt is on the verge of signaling a primary bear market signal. As you can see in the chart below (TLT: ishares 20+ Yr Treasury Bond ETF; and IEF: ishares 7-10 Yr Treasury bond ETF). After a cyclical bull market that got started o 10/18/2013, we have just encountered a bearish secondary reaction, the subsequent rally (blue rectangles) and recently TLT violated its secondary reaction lows. IEF did not confirm, and, hence, it is too early to say that a primary bear market has been signaled. However, IEF is at a stone throw of reaching its secondary reaction lows.

US bonds flirting with a primary bear market signal. Last gasp of a bull market?

My assessment: If we couple a primary bull market in EUR (and by implication CHF), and the weakness of USD debt, we can safely assume that the odds for a lower USD are high. The last shoe to drop is IEF. A confirmed primary bear market in USD debt would lend credence to the primary bull market in EUR/CHF. Furthermore, it would explain the reluctance of the US Stock market to fall. Maybe the Chinese know something, since the Chinese stock market is also under a primary bull market. I don’t have time to show you charts of Chinese stocks, but believe me: What I see is an unambiguous primary bull market in China.

Please mind two things:

a) The Dow Theory can be applied to foreign stocks and to specific non stock markets (i.e. forex, gold, etc.)

b) The now dying primary bull market in US debt was signaled by this Dow Theory blog in 2013. Although its start was quite hesitant (since TLT violated the last recorded primary bear market lows but was not confirmed by IEF), it was a primary bull market signal after all, which has proven to be a very good one for those that had the courage not to outsmart the Dow Theory.  Here you have a chart displaying the primary bull market signal and the bull run than ensued.

A nice bull run since October 2013 seems to be running out of gas

Are the EUR and US Stocks bracing themselves for a lower USD? I don’t know; but I do know that the EUR is bullish and US debt is close to being very bearish.

Please mind that I don’t talk about gold and silver, since, technically, in spite of today’s bullish action (I am writing before the close), technically nothing has changed. One day wonders usually don’t change trends. Furthermore, if I am to believe Fofoa (which I do, since I also have my fundamental ideas, which I try to keep at bay when trading, since they may be flawed), GLD is going to be a poor predictor of USD weakness when the chickens come home to roost. Thus, GLD interests me only as a trading vehicle, but I don't consider it real gold.

The Dow Theorist