Monday, October 5, 2015

Dow Theory Update for October 5: Primary bull market for mining stocks and Chinese stocks signaled today

Secondary trends changed (bullishly) in gold and silver

Well, it seems that trends in all markets are changing. Today there is plenty of information to digest. Stocks (both US and Chinese) undergoing a secondary reaction against a primary bear market. I apologize to my readers for not having given updates as to the secondary reactions, since my time has been in short supply (as usual). However, I have not missed the “meat," which is primary bull and bear market signal. After all, secondary reactions are our “pivot” or reference points which we use to determine whether the primary (the important one) trend is bullish or bearish.

Chinese Stocks

On 08/24/2015 both the FXI and HAO made lower closing lows. From that point, the HAO started a rally whose closing high was made on 09/16/2015 (closing price 24.18). The HAO rallied for 16 trading days.

FXI made a lower closing low on 09/04/2015 which was not confirmed by the FXI. Lower lows without confirmation tend to show that the ongoing trend (bear market in this case) might be running out of steam. From such lows the FXI rallied for 7 days until 09/16/015 (closing price 24.18), thus confirming the rally undergone by HAO. 

All in all, lower lows in the direction of the primary trend (bearish) were not confirmed, whereas higher highs in the direction of a counter movement were confirmed. While this does not change the primary trend (bearish), it is a warning sign that things might change.

Therefore, both the FIX and HAO have rallied for an average of (16+7)/2 = 11.5 days.

This is enough time (more than 8-10 trading days) to label such a rally as a secondary reaction against the primary bear market.

What about the extent requirement necessary for a secondary reaction to exist?

As you can see in the spreadsheet below the FXI advanced by 11.79% and the HAO by 13.61%. You know I like to adjust for volatility, as the minimum 3% movement dictated by the Dow Theory was thought for US stocks, which are less volatile than Chinese stocks. More about volatility adjustments here.

I performed the volatility adjustment the following was. I took the exponential moving average of the daily percentage change of the FXI/HAO. I calculated the 30-day exponential average of such daily changed and compared it with its equivalent in the SPY. Accordingly, the minimum movement for the FXI was 5.34% and for the HAO 7.05%. They were amply exceeded.





% change


Min adjusted volt move


All in all, both the time and extent requirement have been met, and hence unambiguously we can declare a secondary bullish reaction in Chinese stocks, all the gloom and doom notwithstanding.

Things get more interesting when we see what happened after the 9/16/2015 closing highs. Both Chinese ETFs declined. The decline amounted to -7.85 for the FXI and 5.58% for the HAO, which more than exceeds the minimum move in volatility adjusted terms.

Such a pullback (which need not be confirmed, more about it here), set up stocks for a primary bull market signal. Now, if the 9/16/2015 closing highs are jointly bettered on a closing basis, a new primary bull market would be signaled.

Last Friday10/2/2015 HAO closed above its secondary reaction high of 9/16/2015. Today, FXI has confirmed, and hence a primary bull market has been signaled.

Here you have an updated chart (the blue rectangles display the secondary reaction and the orange ones the pullback that followed that set up Chinese stocks for a primary bull market signal).

Primary bull market for Chinese stocks signaled today

Furthermore, this signal is a rather “tradable” one, since our stops lay at the last primary bear market lows which are located at “reasonable” levels. By “reasonable” I mean that our Dow Theory trailing stop is a quite narrow one (around 11.79% and 13.36%). It has nothing to do with the “Chinese situation” I referred to here. More about the Dow Theory trailing stop, here.

I don’t know whether it is going to be a failed signal or something more important is going on. What I know is that from a Dow Theory perspective things have technically changed. Furthermore, I also see that the precious metals universe seems to be getting bullish. Are the markets seeing signs of reflation worldwide?

What happens to Chinese stocks partially affects the behavior of US stocks, and since the latter have also set up for a primary bull market signal, we better keep paying attention to both countries.


The Industrials broke above its secondary reaction closing highs, unconfirmed by the SPY and the Industrials. So, no primary bull market yet.

The primary trend is bearish, as was explained here and here.

The secondary trend is bullish (secondary reaction against primary bear market), as explained here.

 Furthermore, US stocks set up for a primary bull market signal, as explained here:

If the ongoing rally managed to jointly better the 9/16/2015 closing highs (please mind that the Chinese stocks made their last highs on the same date), a primary bull market would be signaled.


The primary and secondary trend is bearish as explained here.

The secondary trend is bullish, as SLV and GLD are in the midst of a secondary reaction against the primary bear market.

Off the closing lows of 08/03/2015 SLV rallied by 6.85% until 08/12/2015. It rallied for 7 trading days. Off the closing lows of 08/05/2015 GLD rallied by 6.92%. So GLD rallied for 12 trading days. The average time for the rally was (7+12)/2= 9.5 days. While I’d have been happier seeing SLV rallying a little bit longer, I feel that we can accept the “time” requirement for a secondary reaction as fulfilled.

On the other hand, the extent requirement has been fulfilled too. I don’t have the time (and neither have my readers, as this is a long post) to give you the details concerning the volatility-adjusted measurements, but both rallies in the vicinity of 7% amply exceed the minimum movement.

Nevertheless, it is not the most “perfect” secondary reaction, since the modest rally that emerged from the last confirmed recorded lows (8/3/2015, and 8/5/2015) was affected by a non-confirmation and divergence, namely, GLD was going up and SLV refused to confirm and even started to decline. Thus, given that the time requirement was barely met and that the latest highs made by GLD were not confirmed by SLV, I feel it is a slightly debatable secondary reaction.

In spite of all my qualms, there are the following aspects which weight on the bullish side:

a) On August 26, 2015 SLV made a lower closing low, unconfirmed by GLD. Thus, a new primary bear market low, unconfirmed, increases the odds for a reversal of trend, at least of secondary proportions (which gives more validity to the secondary reaction I reluctantly spotted).

b) Furthermore, the sequence higher high unconfirmed followed by lower low unconfirmed tends to be finally bullish when the last recorded highs are finally jointly broken up. Many traders get caught on the wrong foot (when first long, and were whipsawed, then reversed and went short, to be forced to cover), and the final move tends to be strong. We saw this in Chinese stocks in 2014, when a higher high unconfirmed and a lower low unconfirmed set up such stocks for an explosive up move (ca. 30% with no intervening breather, namely a secondary reaction after the breakout). As I wrote here:

“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".”

 Both SLV and GLD underwent a significant pullback after making their secondary reaction highs. Such a pullback set them up for a primary bull market.

SLV has broken up its secondary reaction lows (displayed as a red horizontal line). GLD, though, has failed to confirm, and hence we cannot declare a primary bull market.

So now, we have to wait. Either GLD deigns to confirm and a primary bull market will be signaled in gold and silver, or the primary bear market lows are jointly violated in which case the primary bear market will be reconfirmed.

Here you have an updated chart. The blue rectangle displays the secondary reaction against the primary bear market and the red lines show the relevant levels to be broken up for a primary bull market to be signaled.

SLV and GLD in a secondary reaction and set up for primary bull market


Today the primary trend turned bullish.

Take a look at the chart below.

Primary bull market for SIL and GDX signaled today
GDX and SIL made its primary bear market lows on 8/26/2015. From that point GDX and SIL it rallied for 2 day until 08/28/2015, which of course, is not a secondary reaction (as two days do not fulfill the “time” requirement). Hence, on 8/28/2015 we didn’t have a secondary reaction. From that point GDX and SIL started to decline. SIL made a lower low unconfirmed on 9/10/2015. From that date it started to rally until 9/18/2015. On that date, both GDX and SIL made higher highs. Furthermore, if we measure the time elapsed from each respective primary bear market low, we see that SIL rallied for 6 days (or 16 days, if we consider as the only valid low to consider the last confirmed one, which is debatable, as explained in a similar difficult technical juncture here). GDX rallied for 16 days. Even if we take just 6 days for SIL (instead of 16), the average advance for both ETFs was (6+16)/2 = 11 trading days, which fulfills the “time” requirement for a secondary reaction.

As to the extent requirement, the spreadsheet below says it all.





% change


Min adjusted volt move


SIL rallied 10.91% and GDX rallied 11.04%., which amply exceeded the volatility-adjusted minimum move (based on 30 days exponential average of daily percentage change close-to-close).

All in all, both the time and extent requirement for a secondary reaction had been met for SIL and GDX

Subsequently, both ETFs underwent a pullback (which was volatility-adjusted meaningful) that set them up for a primary bull market signal.

On 10/02/2015 GDX broke above its 9/18/2015 secondary reaction closing highs. SIL has done so (and confirmed) today.

Hence, a primary bull market has been signaled today.

As with Chinese stocks, this signal is a rather “tradable” one, since our stops lay at the last primary bear market lows which are located at “reasonable” levels. By “reasonable” I mean that our Dow Theory trailing stop is a quite narrow one (around 11%).


1) Chinese stocks: Primary trend turned bullish today.

2) GDX and SIL (gold and silver ETF miners): Primary trend turned bullish today.

3) GLD and SLV (gold and silver): Secondary trend bullish. Primary trend remains bearish.

4) US Stocks: Secondary trend bullish. Primary trend remains bearish.

The Dow Theorist

1 comment:

  1. Thanks for the update. I was waiting for one as always : )