I don't like the prospects for China, it's been brewing for a while I'm sure someone said before me, I don't recall it being an issue until after we said it here, "Commodity weakness tells us there are troubles brewing in China".
Two weeks later the PMI manufacturing and services both confirmed what we saw in commodities.
Something recent is going on in China or at least the FXI (Ultra FTSE China 25) and FXP (UltraShort FTSE China 25).
I'll show you the FXI first and then a quick look at the FXP and a very recent change in character that may make China worthy of your consideration and tell you a bit more about the market in general if China is looking bad.
I wish I could tell you some fancy name for the 5-day trend in the China long, FXI ETF, there is none, it's simply deterioration since 2011 which is when we noticed commodity weakness. I suppose there is a sort of large bear-flag / pennant in place which may be one reason why these ETFs look very close to making a larger move as the pennant squeezes like a coiled spring, ready to break one way or the other.
Which way? The first rule would be to follow the trend.
On a daily chart there's a recent range from June, the downside halted, but China didn't rally much off the June lows like the US markets. That relative weakness makes me also think that in a global equity downturn, China's downside relative performance will be better.
Still looking at the long or Bull China ETF, FXI, the 2 day 3C chart shows clear problems in 2007, it shows a large positive divergence/accumulation going in to the 2009 lows, then distribution in 2010/2011 which grew worse through 2012.
The 60 min chart tracks several large negative divergences in the trend as it switches from down to flat.
A closer look shows some tops and some head fake / false breakout moves that have failed as they saw distribution on the attempt, this has only grown worse recently.
The 15 min chart showing the August-present trend with some small accumulation to get it moving and distribution in to higher prices, particularly at false breakouts because that's when traders will chase the stock and give Smart Money demand to sell in to or short., again recently the divergence is worse.
Now FXP, the Ultrashort ETF (opposite of everything we saw above). I only need 3 charts.
The first is the 2 day 3C chart showing confirmation on the downtrend, a large positive divergence around 2010 when the bull ETF was going negative, an area in red that represents that positive divergence and a 100% run to the upside in 6 months, finally the recent improvement in this ETF that you buy and it gives you short exposure to China.
The second chart shows that since that 100% run in 2011, this is the first time the 60 min chart has really started to see heavy institutional interest with a leading positive divergence, something is getting ready to happen as smart money positions itself.
It's difficult to see where or when to enter based on divergences alone, although if we do get some market strength, it will be much easier. I can say for the long ETF, FXI below, any move above $35.40 seems to make sense as these are where the failed breakouts move above.
Since you are more likely to trade FXP long for short exposure, the level is a move below $24.10.
However if we do get some broad market strength, then picking a negative divergence/top area will be much easier.
While the recent returns haven't been much, just look at how the charts are coming to a head and deteriorating rapidly as they do, I suspect the profit potential is growing each day.
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