LOOKING TO THE EAST

From here in the US, looking East we think about the EU area trouble, but as I have been talking about for over a month now, commodity prices seemed to be warning of a slow down in China that was later confirmed by their non-manufacturing and manufacturing PMI, both in contraction. Today we see exports are also falling off. A Slowdown in China (and we are already seeing it in Japan) could really turn things upside down as the world has never faced a global recession the way we do now due to the trade agreement and "new world order" of the last several decades. Literally, traders and institutions have never faced this prospect before, so while you keep your eye on trades in the Euro zone, don't overlook China.

One possible trade you may want to consider is in Steel, if infrastructure slows down in China as well as manufacturing, we'd expect to see steel performing badly, here's the Dow Jones Steel Index, as you'll see, Steel shorts may not be a bad idea, especially if we can find an Australian company.

 DJUSST Steel weekly 200 ma turning over, there's obvious pressure in steel as it broke down badly this year, as we typically see, after a break down there's a bounce above resistance and this tends to be the last up leg before the implications of the top pattern play out.

 The daily 3C DJUSST chart over a long period since 2007 shows a likely top in 2010/2011. Note the unmarked positive divergence at the lows of 2009.

 On a 6 day 3C chart reducing the noise of QE1/QE2, things actually look at lot worse then 2007-2008.

 As far as confirmation, the 60 min chart is very negative and especially so at the recent Oct.-December rally-about the same time the realization hit that China is in trouble in several ways.

 The 30 min 3C chart confirms the recent negative divergence.

 The 15 min chart has been all downhill for some time.

 Even the short term charts are really ugly, that's a horrible leading negative divergence.

Same on the 2 min chart, so we'll be looking for steel stocks.

As for a short on China directly, if you don't mind ETFs as they do have some drawbacks.

 Here's the CHINA 25 long ETF FXI, note the negative divergence on the hourly hart and compare to its inverse (short) counterpart, FXP below on the same timeframe.

 FXP, which is the Ultrashort ETF on the China 25 is exactly the opposite showing accumulation.

 The short term FXI 5 min (China 25 long) is negative in multiple places.

The counterpart, FXP (Ultrashort China 25) on the same timeframe is leading positive. This should tell us something about how smart money is positioning itself with regard to China, which was recently raising rates to fight inflation and just cut rates because of an obvious slowdown. They also have a real estate bubble and all of this adds up to inflation and stagnating growth better known as stagflation. Not good for China or the world. So take a look at China and of course materials/commodities, like Steel. Australia is where they get a lot of their raw material imports so an Australian iron ore/steel company would probably be one of the best bets, I'll take a look, let me know if you know of any companies and we'll check them.