Red Dragon Awakes: Chinese Equities On The Move

| About: iShares China (FXI)

Summary

Down 45%, China is waking up after slumbering for 11 months.

Chinese Large Caps (FXI) are leading the way.

The breakout in Chinese equities provides a potential opportunity for investors.

It's no secret that Emerging Markets have been outperforming U.S. Equities since mid-January. We get it, the financial media loves to look at U.S. equities. That's their problem. We aren't myopic. Instead, we like to look globally across all asset classes to find opportunities. Why would we ever want to limit ourselves? There is so much opportunity outside the U.S., it would be negligent to ignore it. That brings us to today's research release regarding Chinese equities.

Chinese equities have been hit hard for the past 11 months, dropping 45% during that time frame. Recently, however, the trend has changed. Buyers have stepped into the market, creating demand for Chinese stocks and moving prices off of their mid-February lows. Using FXI, an ETF that seeks to track the investment results of an index composed of large cap Chinese equities that trade on the Hong Kong Stock Exchange, we can take see the change in demand and take advantage of this potential opportunity.

Here's a daily chart of FXI going back two years:

Click to enlarge

We can easily see the dramatic depreciation over the past year. We can also see that price and momentum (14-period RSI) diverged for over a month. We like that. Subsequently, buyers created enough demand to cause price to breakout of the year-long downtrend. This, combined with the aforementioned momentum divergence, is a great set-up for a well-defined risk/reward trade. After all, investing is not just about buying blindly and hoping for the best. Rather, our job as market participants is to minimize risk while investing in high reward scenarios. FXI fits our asymmetric risk/reward profile.

We think FXI is worth owning above 32.70. Below that, and we're no longer interested. We're not gamblers. We're investors. We're decision makers. After all, if we wanted to gamble, we'd head over to Macau.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FXI over the next 72 hours.

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

Additional disclosure: Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.