Trading A China Rally Using These 2 ETFs

Seeking Alpha

China’s Shanghai Composite has had a volatile ride lower since setting its all-time intraday high of 6,124.04 back in October 2007. To its multiyear low of 1,664.93 set in October 2008, the Chinese benchmark plunged 72.8%. This range is still being consolidated today.

A positive occurred in overnight trading on Tuesday.

The Shanghai composite traded as low as 3,034.10 just before President Trump and Supreme Leader Kim Jong-un shook hands for the first time. Then as an agreement was signed, the Shanghai Composite rebounded to close at 3,080.55, above the June 11 high of 3,063.61, defining a ‘key reversal’ day.

The Shanghai Composite is down 6.9% year to date and in correction territory 14.1% below its 2018 high of 3,587.03 set on Jan. 29.

Here’s the weekly chart for the Shanghai Composite

Weekly Chart For The Shanghai CompositeCourtesy of MetaStock Xenith

The Shanghai Composite was an ‘inflating parabolic bubble as 2007 began and the horizontal lines are the Fibonacci Retracement levels of the decline from the Oct. 2007 high of 6124.04 to the Oct. 2008 low of 1,664.93. Note how the 23.6% retracement has been a magnet between the week of June 3, 2009 and the week of March 5, 2016 as the Chinese benchmark was consolidating the bear market that began from a secondary bubble peak of 5,178.19 set during the week of June 12, 2015.

The 2015 bubble ended with China’s Black Monday on Aug. 24, 2015. The open for the U.S. averages was called a ‘Flash Crash’. At the peak on June 12, 2015, the composite was above the 61.8% retracement of 4,416.92, at the January 2016 low, it was stabilizing around the 23.6% retracement of 2713.67. The rally into 2018 could not hold the 38.2% retracement of 3,364.66. The average is below its five-week modified moving average of 3,116.61 and the 200-week simple moving average or ‘reversion to the mean’ at 3,213.39.

If gains are sustained, the upside for the Shanghai Composite is into the 3,140 to 3,318 range which are my monthly pivot and quarterly risky levels, respectively.

The iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) represents a basket of large- and mid- cap emerging markets equities with a 33.63% weighting in China. EEM closed Monday at $46.33, down 1.7% year to date and in correction territory 11% below its 2018 high of $52.08 set on Jan. 25.

Weekly Chart For EEMCourtesy of MetaStock Xenith

The weekly chart for EEM shifts to positive given a close this week above its five-week modified moving average of $46.70. The ETF has been above its 200-week simple moving average of $38.34 since the week of March 24, 2017 which is the ‘reversion to the mean’ now at $39.65. The 12x3x3 weekly slow stochastic reading is projected to rise to 25.58 this week, up from 34.08 on June 8.

Investor Strategy: Buy weakness to my annual value level of $41.27 and reduce holdings on strength my quarterly risky level of $49.33.

The iShares China Large-Cap ETF (NYSEARCA:FXI) tracks the FTSE China 50 Index composed of large-cap Chinese equities that trade on the Hong Kong Stock Exchange. It is heavily-weighted to financials at 47.18%. FXI closed Monday at $48.02, up 4% year to date and in correction territory 11.1% below its 2018 high of $54.00 set on Jan. 26.

Weekly Chart For FXICourtesy of MetaStock Xenith

The weekly chart for FXI is positive with the ETF above its five-week modified moving average of $47.60. The ETF has been above its 200-week simple moving average of $38.17 since the week of May 5, 2017 which is the ‘reversion to the mean’ now at $40.50. The 12x3x3 weekly slow stochastic reading is projected to rise to 50.40 this week, up from 44.88 on June 8.

Investor Strategy: Buy weakness to my semiannual and annual value levels of $41.86 and $37.90, respectively, and reduce holdings on strength of my quarterly and monthly risky levels of $48.42 and $50.57, respectively.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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