How To Trade Chinese ETFs As The Shanghai Composite Slumps Deeper Into Bear Market Territory

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Includes: EEM, FXI
by: Richard Suttmeier
Summary

The Shanghai Composite set its 2018 low of 2,644.30 on Tuesday then had a daily “key reversal” suggesting that Chinese ETFs are tradeable.

One way to trade the Chinese market is with the iShares emerging markets ETF which remains below a ‘death cross’ but stabilized around my annual pivot of $41.27.

Another Chinese ETF is the iShares China Large-Cap ETF, which is also below a “death cross” but is well above its annual value level of $37.90.

China’s Shanghai Composite has been struggling since setting its all-time intraday high of $6,124.04 in October 2007. This index crashed by 72.8% to its October 2008 low of 1,664.93. Unlike most major equity averages, the Chinese benchmark has not been able to rally anywhere near that high.

Here’s the weekly chart for the Shanghai Composite

Weekly Chart For The Shanghai Composite Courtesy 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 5, 2009, and the week of Dec. 5, 2014, just as the bubble of 2015 began to inflate. The secondary bubble peak of 5,178.19 was set during the week of June 12, 2015.

The 2015 bubble ended with China’s Black Monday on Aug. 24, 2015. This was also the day of the ‘Flash Crash’ and the U.S. open that day. At the peak on June 12, 2015, the Shanghai Composite was above the 61.8% retracement of 4,420.92 and at the January 2016 low, it was stabilizing around the 23.6% retracement of 2716.49. The rally into 2018 could not hold the 38.2% retracement of 3,367.92 in February. The composite is below its five-week modified moving average of 2,741.85 and well below the 200-week simple moving average or “reversion to the mean” at 3,245.89. To stabilize, we need to see a trend above the 23.6% retracement of 2,716.49.

The iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) represents a basket of large- and mid- cap emerging markets equities heavily-weighted in China. EEM closed Tuesday at $41.98 down 10.9% year to date and is deep into correction territory 19.4% below its 2018 high of $52.08 set on Jan. 26. This ETF set its 2018 low of $40.63 on Sept. 11.

Weekly Chart For EEM Courtesy of MetaStock Xenith

The weekly chart for EEM is negative with the ETF below its five-week modified moving average of $42.78. The ETF has been above its 200-week simple moving average or “reversion to the mean” of $39.69 last tested during the week of March 24, 2017, when the average was $38.37. The horizontal lines are the Fibonacci Retracement levels of the decline from the all-time high of $55.84 set in October 2007 and the post-crash low of $18.22 set in November 2018.

After setting its 2018 high of $52.08 in January, the ETF has been trading back and forth around the 61.8% retracement at $46.32. The 12x3x3 weekly slow stochastic reading is projected to rise to slip to 26.60 this week down from 28.03 on Sept. 14.

Investor Strategy: Buy weakness to my annual and semiannual value levels of $41.27 and $35.80, respectively, and reduce holdings on strength my monthly and quarterly risky levels of $44.98 and $50,11, respectively.

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 Chinese financial and energy companies. FXI closed Tuesday at $41.81, is down 9.4% year to date and in bear market territory 22.6% below its 2018 high of $54.00 set on Jan. 26.

Weekly Chart For FXI Courtesy of MetaStock Xenith

The weekly chart for FXI is neutral with the ETF below its five-week modified moving average of $42.16. The ETF is above its 200-week simple moving average of $40.68, which is the “reversion to the mean.” The horizontal lines are the Fibonacci Retracement levels of the decline from the all-time high of $73.19 set in November 2007 and the post-crash low of $19.35 set in October 2018.

After setting its 2018 high of $54.00 in January, the ETF failed to hold its 61.8% retracement of $52.62 and is now sitting just above its 38.2% retracement at $39.91. The 12x3x3 weekly slow stochastic reading is projected to rise to 25.29 this week up from 23.05 on Sept. 14.

Investor Strategy: Buy weakness to my annual value level of $37.90 and reduce holdings on strength my semiannual, monthly and quarterly risky levels of $43.80, $45.41 and $48.96, 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.