FXP Trade Set-Up

FXI is an ETF that tracks the FTSE China 25, which is similar to the Dow -30, the FTSE 25 tracks 25 of China's large Caps stocks that trade on the Hong Kong exchange, FXI is the long China 25 ETF. FXP is the inverse of FXI with 2x leverage (Ultrashort). I prefer FXP for the leverage, but FXI has tons more volume, in fact FXP's volume is actually quite light, trading around 75,000 shares a day which is on the light side for me usually, but I have traded FXP and had a lot of success with it. Both ETFs are optionable, but I'd really watch the volume there and the spreads.

In any case, FXP looks like it is setting up for a long trade with FXI setting up for a short trade. Tine in FXI today was not that hot even though China had relatively better than expected manufacturing data overnight, printing at 51 which is the highest print of the year.

My personal feeling is that Emerging Markets, especially China are exposed to a lot of danger with the broad market. In addition the housing market in China has not been good, several firms have defaulted in recent months, and the PBoC's policy actions are VERY MUCH UNLIKE the F_E_D's, the People's Bank of China (PBoC) takes a much broader, longer term view of policy action whereas the F_E_D takes  avery narrow, short term view which was recently confirmed over the weekend as the Bank for International Settlements (BIS) which is known as the Central Banks' bank, issued a rather scathing annual report essentially saying that "Leading Central Banks", have opted to take the easy path even if in the end that path returns ZERO results which is essentially exactly what the F_E_D has done with nearly $4 Trillion in balance sheet expansion since the Credit/Housing crisis began and what did they get for all of that money? The worst quarterly GDP print in 5 years (Q1 2014). Obviously if you've read this site you know it is my personal feeling that nearly everything the F_E_D has done has been what I call a "Stealth Bank Bailout". I say this because as you may remember, the voting public was exceptionally angry as multiple company's were bailed out including AIG and General Motors and then many of these CEOs and top executives saw fit to give themselves cushy bonuses and golden parachutes. Thus the F_E_D's POMO has been an easy way to infuse the banking system with near risk free profits. However, even with 3 Quantitative Easing episodes plus Twist, Twist Light and ZIRP, the banks still just used a record setting third of a trillion dollars yesterday for window dressing, keep in mind this is a new record amount for the F_E_D's 1-day reverse repo. When you have a record setting amount on loan from the F_E_D, the "regulator" of these banks, for a single day which happens to be the last day of the quarter, well it's pretty clear what's going on and how ineffective the F_E_D has been even in their stealth bailout of the banks.

The point was, the PBoC takes a much broader view of economic policy, in terms of decades.

In any case, here are the charts for FXP and some of FXI as the volume in FXP gets so low in some of the intraday timeframes it's hard to get a clean signal.

*Remember, FXI is the unleveraged long China 25 ETF and FXP is the 2x leveraged (Ultrashort) inverse of FXI or essentially 2x short the China 25.

FXP

 FXP has given some very good trading signals in the past, while I do think there will be a trend that emerges that is negatively biased for the China 25, for now this is really being treated as more of a long swing trade and if it develops in to something more, we'll cross that bridge when we get there.

It appears there may be a potential base setting up between the late 2013 lows and the recent 2014 lows at the white trendline.

 This is FXP's 60 min chart, I can go further out, but I already have a lot of charts. This chart is nice and clean if you follow each of the past divergences as they forecast the moves in FXP to come (accumulation in white/distribution in red). As you can see the most recent base area mentioned above has a leading positive divegrence. The 2 and 4 hour charts show a large positive divegrence for most of 2H 2013 which is the first area of the potential base on the daily chart above with this current area leading positive in a much stronger way.

 The 30 min chart shows a negative at the April highs that turned down and in to a positive through most of June, it's also leading well above the former 3C highs from April although price is lower.

The 15 min chart shows the same clearly enough that I felt notating the chart would be distracting.

FXI (Long China 25))

 As you can see, FXI which is the opposite price action of FXP gives a confirming 3C trend at the green arrow and then confirmation of FXP with a negative divegrence at its June highs which confirms FXP's positive divegrence at its June lows. There's also a small bear flag apparent to the far right, similar to the broad US markets.

 Looking at FXI's 15 min chart (remember volume is much, much larger in FXI) we see the same thing, a clean confirmation of the uptrend preceding the June top in which we have a leading negative 3C divegrence forecasting lower prices ahead, even at the current bear flag 3C continues to lead negatively to new lows since the transition.

 The intraday charts are where the charts start to get a bit sticky and apparently ther are a lot less head fakes on the Chinese exchange than the US ones so we have to adjust for that and give head fakes a lower probability.

That means the accumulation on this 3 min chart seen at the lows, created the bear flag correction which is now seeing distribution in to it as we saw out bear flag in US markets with an apparent head fake move as we'd normally expect to see being a bear flag is a common technical price pattern.

For instance...

The IWM flag is probably one of the best defined, I believe because of some accumulation patterns at the base of the flag, this is a manufactured flag that was meant to be head fakes, not a naturally occurring flag, one of the reasons is the market's resiliency after St. Louis F_E_D president, James Bullard came out pre-market on 6/26 and told Fox Business News that the "Market was wrong" and it didn't appreciate how close the F_E_D was to hiking rates and also gave the earliest to date estimate of when rates may rise, being early 2015, about half a year before the market's consensus and F_E_D guidance which I believe is not going to be a matter of choice, but something the F_E_D is forced to do because of inflationary trends running hot , which is something the BIS also covered in their annual report, warning "Leading Central Banks" not to "Hike rates too slowly or wait too long", clearly concerned about inflation as well.

As far as any head fake move of FXI's bear flag go, if it comes we'd likely see it tomorrow as it would be following US markets, but I was surprised FXI didn't act better considering the manufacturing print overnight being the best China has seen all of 2014.

FXI-China 25 long ETF

 The intraday 2 min chart shows a negative divegrence in to today's price action, which would mean a positive divegrence in FXP's pullback today. In other words, it looks like the bear flag is getting ready to fail and send FXI lower/FXP higher, the trade I'd be interested in is FXP long (2x short the China 25).

FXP(UltraShort China 25)

 The daily chart for FXP shows an area of support at the red trendline, if there were to be a head fake, it would likely be under this area, there's a larger support area from last year around the $56.70 level, about a dollar lower.

In all honesty, I might just open a partial position and add to it if there were a head fake move or open a full position, but leave a stop wide enough to account for a possible head fake move.

One other reason there may be a head fake move for FXP is the gap in FXI's daily chart...

Here you see the trend line for FXI's daily chart clearly broken, but there's a gap just above today's intraday high, even with a bearish daily candle with a small body and longer upper wick (higher prices were rejected intraday), that gap may be filled as FXI trades significantly more volume.

If you are interested, you might set some alerts and feel free to email me if there are any head fake moves and we can check them out and see what they look like, but once again, there seem to be less of these moves in the Chinese equities market than the US. Otherwise, I really like FXP for swing trades and then some.