China/FXI/FXP

If you recall my post last week about trade management and specifically determining Swing Trade Trends then what is to follow will make some sense or perhaps refresh your memory. Remember, PRICE IS ALWAYS THE FINAL JUDGE AND IT IS PRICE THAT PAYS OR DEPLETES YOUR ACCOUNT so understanding how to qualify a trend is important, especially when the market enters a more trending environment.

Lets look at China and the FTSE/Xinhua China 25 Index ETF, the ticker is FXI, it's inverse (short the China 25 is FXP). This week China has had so not so great news including the discovery that they've been hiding about $500 billion $USD in bad debts, made largely to local municipalities with poor documentation. Then we also have the most recent rate hike today by the PBoC of 25 basis points on deposit and lending rates, the 3rd hike by the PBoC this year.

Using today's data and assuming there are no major changes, we can qualify FXI as having experienced a change in trend on a swing basis from up to down.

Starting from the left, the first daily candle inside of the white square s our downtrend signal candle because as you may remember, it is the last candle in the downtrend of June to make a lower low and a lower high. The second candle inside of the white box with the yellow arrow below it is the trend changer. It changed the trend to up as the low of this candle is higher then the high of the previous signal candle. The uptrend has begun, however, as I mentioned to you in the first post, this is a concept and does not need to be viewed as a stand alone system. You may have entered FXI long for any number of reasons that you choose according to your trading style.

The trend continues up for another 5-days. As an aside, FXI largely follows the US equity markets and this is around the time we have been in rally mode.

The candle with the red arrow above it is the last signal candle in the trend as it has posted the last higher high/higher low. Now we look at the two candles inside the red box, the first candle is considered noise, its high is not lower the then previous (signal candle) candle's low which is drawn in with an orange trendline. However, thus far today, our price candle has a high that is lower then the signal candle's low qualifying today as a change in the swing trend to down. The fact that yesterday's candle posted a lower close and thus far today's candle looks to be on track to post a second consecutive lower close, we have a newly established Swing downtrend in FXI.

The natural swing trade candidate would be the inverse of FXI, FXP.

As for FXI and 3C, as I mentioned, there could be many different reasons to enter the trade, but it's important to understand where you are currently as a trend's direction is the most likely path of least resistance.

 3C 60 min FXI shows a positive divergence at the lows from the June swing down and recently distribution via several negative divergences.

The 1 min chart of FXI gives us more detail as to the reversal, you can see the last qualified higher high/higher low day saw a nearly day long negative divergence followed by lower prices. Currently 3C is in line with price. Should the broader stock market make a higher high, there's a chance FXI will try to fill some of today's gap down, that doesn't mean the trend will change as there are specific conditions mentioned above for determining a change in trend. A fill of the gap may register simply as noise within the downtrend.

As for the trade, lets look at FXP.

 Following the same Swing Trend concepts above, FXP (the inverse of FXI) was in a downtrend, the last candle of the downtrend to make a lower low/lower high is in the red square. A candle on the close with a low that is above this signal candle's high, qualifies the trend as an uptrend which thus far, today's candle does. In addition, yesterday and today posted to consecutive higher closes (as of this point-the day is not over).

 Looking at the hourly 3 chart of FXP we can see several negative divergences as FXP made higher highs (remember distribution occurs in to higher prices). The tell-tale reversal signal came with a false breakout which was revealed as a false breakout the same day it broke out above local resistance at the red trendline. Being FXP opened higher then the trendline, we had a breakout, it was confirmed as a false breakout not only by 3C which made a negative divergence, but also by the fact that the close on the same day fell below the breakout level. As I stated before, you can use many different techniques for entering a trade, I'm simply trying to help you qualify trends versus noise in a trend that may not be relevant. We have a short positive divergence at the lows of FXP's decline and price heads higher.

Assuming this price action is similar to our close, today confirmed the trend reversal to up in FXP

Right now, FXP looks like a decent long candidate.

One other thing I should point out, as I mentioned earlier, FXI tends to trade in similar fashion to our broad market indices.  When looking at the price action of FXI vs the SPY, we were offered a warning signal.

 **(Note the candle labelled as the 25th should be labelled as the 27th). When comparing the SPY (above) to FXI (below), we see the FXI lead the market in starting the rally first. When we compare the last 3 days n the red boxes, FXI has fallen apart while the SPY struggles laterally.

Remember, the more observations we can objectively make, the better chance we have of putting together a solid opinion of what the market is likely to do; this is just 1 piece of the puzzle, but recall yesterday I also showed you the Australian dollar (FXA) which tends to be a leading indicator for the US equity markets. In looking at both, we would have two pieces of the puzzle confirming each other and perhaps fitting in objectively with other observations we have made.