And some thoughts concerning US Stocks…
Market
relevant events continue to pile up, while time remains in short supply.
Last Friday,
FXI broke below the lows of the last secondary reaction (which were made on October,
10th, 2014), and, accordingly confirmed HAO, which had already done
so on July 7th, 2015. Confirmed lower lows, means that the lows of
the last completed secondary reaction have been violated, and accordingly a “type
2” primary bear market signal has been signaled (Rhea’s book, "The Dow Theory", page 77, Fraser
Publishing). I say, “type 2," since the “normal” “type 1” primary bear
market signal, is a secondary reaction that develops from the latest top, to be
followed by a rally that fizzels out, and thereafter a violation of the
secondary reaction lows. This, unluckily, and as was explained here, did not
occur with Chinese stocks, as they plunged into the abyss with no intervening
rally after the last secondary reaction. More about all this here.
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Anatomy of a market crash and an unmerciful market: Chinese stocks |
The blue ellipses
at the bottom of each chart show the violation points of the lows of the last
completed secondary reaction (red horizontal lines). On the other, hand, the blue ellipses at the top
of each chart display the unconfirmed higher highs, which was a yellow flag, as
I wrote on June 18th, 2015:
“HAO made on two occasions higher highs, which were not confirmed by FXI
(highlighted by blue ellipses). Such a non-confirmation tends to be a harbinger of a trend change of,
at least, secondary proportions (emphasis added)”
Of course, I
am keenly aware that a “sell” (primary bear market) signal that comes so late is
kind of worthless. I wrote about it some days ago, and such a setup should
give us Dow Theorist pause for thought. What if it were to happen to the US market?
Please go to my post and read my musings. By the way, the US stock market, has,
once again, behaved on a becoming manner, and has allowed us to escape a
collapsing market at a very short distance from the top. The SPY made its top
on May 21st, 2015 at 213.50. As per my interpretation of the Dow
Theory, a primary bear market was signaled at the close of August 20th,
2015 at 203.97, which amounts to a -4.46% decline. Not bad. However, we must
humbly admit that the Chinese stocks market is not an easy animal to tame.
The practical
implication I take from the Chinese primary bear market signal is:
a) There is
headwind for equities, included US Stocks. The principle of confirmation does
also work between markets. A primary bear market signaled on several worldwide
stock indices adds to the bearishness of the US Stocks market primary bear
market signal.
b) One never
knows what lies ahead. Even though, it may seem that the primary bear market
signal for the Chinese market, has come “near the bottom” (as FXI has declined
from the closing top of 52.71 on 04/28/2015 to 36.56 on Friday 21st,
2015, which is a -30.64% decline), one never really knows. What if the market
still declines by a further 30%? This has happened under some primary bear
markets; not always, but has happened. In other words, I personally would not touch
Chinese stocks, until things firm up, which means that I get a primary bull
market signal. Why stick your neck out trying to catch falling knives?
Now,
technically, there is a bleak picture for stocks, be it in China, Europe or US.
When things change, I change, and, if it is finally a failed primary bear
market signal, which forces me to reenter the market at a higher price. So be
it. The small loss taken by having to reenter at a somewhat higher price from the primary bear market signal is the
price I pay (like an option) for safety.
I’d like to
post later (maybe tomorrow) some thoughts concerning the primary bear market
signal for US Stocks which was signaled here and here.
I know, I
know, I owe my readers the second part of my post concerning the Chinese stocks
market; namely, the “meat”: What to do, when the market, as with Chinese stocks, refuses to setup sell signals at a reasonable distance from the top. Events
are piling up, and the answer is not easy. I have some ideas, which hopefully,
will be posted soon.
Sincerely,
The Dow
Theorist.
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