Dow Theory Update for June 18: Chinese stocks are undergoing a (bearish) secondary reaction

Trends unchanged.

US stocks:

The ranging continues, and with it, trends have not changed. Thus, as per my reading of the Dow Theory, the primary and secondary trend remains bullish. Here you can find the latest in-depth explanation, which remains fully applicable to current market conditions:

http://www.dowtheoryinvestment.com/2015/05/dow-theory-update-for-may-18-primary.html

I say that the secondary trend remains bullish, which is tantamount to saying that no secondary reaction has been signaled yet. Here you find a deeper explanation as to the non-existence of a secondary reaction, which is also a good primer on appraising secondary reactions:

http://www.dowtheoryinvestment.com/2015/06/dow-theory-update-for-june-10-nuances.html

Chinese Stocks

Is headwind for US Stocks coming?  Chinese stocks are undergoing a secondary (bearish) reaction against the primary bull market. Please have a look at the chart below:

Orange rectangles on the right side of the charts highlight ongoing secondary reaction

HAO made on two occasions higher highs which were not confirmed by FXI (highlighted by blue ellipses). Such a non-confirmation tends to be harbinger of a trend change of, at least, secondary proportions.

FXI has retreated -10.85% off its last recorded closing highs, whereas HAO has retreated -9.27%. I have performed my volatility adjustments (i.e. 50 days volatility comparison with the SPY) and without any doubt such a movement more than exceeds minimum volatility thresholds (set by Rhea and Schannep at 3% for US indices). Hence, the extent requirement for a secondary reaction has been amply met. Even under a Rhea/Classical Dow Theory viewpoint, the current decline has retraced more than 1/3 of the last primary bull market swing (counted from the lows of the last completed secondary reaction).

Furthermore, the time requirement has also been amply met, as it is evident from just a cursory look at the charts that both ETFs have been declining for more than 8 trading days each. 

From now on, we have to look at a rally of ca. +3% (assuming volatility does not change much) in at least one of the two ETFs. Once this rally occurs, Chinese stocks will have completed a primary bear market set up. We are not there yet.

So, the primary trend remains bullish, and the secondary trend is bearish (secondary reaction).

GOLD AND SILVER

The primary trend is bullish as explained here.

The secondary trend turned bearish on February 6^th, 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.

US DEBT

As to US debt, a primary bear market signal was signaled on June 3rd, 2015. All price action from June 3^rd remains bearish, and hence both the primary and secondary trend for US debt remains bearish.

Furthermore, the brand new primary bull market for the EUR is no good omen for US debt. The primary and secondary trend for the EUR (and CHF) remains bullish.

Here you have the details:

http://www.dowtheoryinvestment.com/2015/06/dow-theory-special-issue-us-bonds.html

Sincerely,

The Dow Theorist