Dow Theory Special Issue: Primary bear market for Chinese stocks signaled last Friday 21st

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, 10^th, 2014), and, accordingly confirmed HAO, which had already done so on July 7^th, 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.

Here you have an updated chart:

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 18^th, 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 21^st, 2015 at 213.50. As per my interpretation of the Dow Theory, a primary bear market was signaled at the close of August 20^th, 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 21^st, 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.