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

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