Have We Seen a Bottom in China Stocks?

by Jim Woods | April 30, 2013 6:45 am

The saga continues for Chinese stocks.

Equities tied to the world’s second-largest economy have seen more than their fair share of volatility in recent years. Last September, we saw a bottom of sorts in Chinese stocks as the large-cap iShares FTSE China 25 Index (NYSE:FXI[1]) rebounded off an August plunge to promptly begin an impressive five-month run that took the ETF up 30% by the end of 2012.

Yet true to its recent volatile past, stocks in FXI then promptly tumbled from their February high through mid-April. In fact, from Feb. 1 through the recent closing low on April 17, FXI crumbled 16.7%.

A slowdown in the rate of GDP growth and data suggesting a slowdown in manufacturing have been cited as chief culprits for the 2013 selloff, but I suspect there’s more to the selling in China than just the data.

Given the upward run in U.S. stocks over the same period, I think we’ve seen much of the global fast money essentially calculating that the upside in Chinese stocks was over — at least in the short run. This rotation away from Chinese stocks and into U.S. equities has resulted in a Dow Jones Industrial Average spike of nearly 10% year-to-date.

Now, however, it appears that the fast money has found a taste for China again.

Since that April 17 low, shares of FXI have spiked some 6% through April 26. The chart here of FXI shows the big move in the bellwether Chinese fund:

China Stocks Have We Seen a Bottom in China Stocks?[2]

As you can see, buying in Chinese stocks last week has taken FXI above its long-term, 200-day moving average (red line), and its short-term, 50-day moving average (blue line). The breaching of not one, but two key technical resistance levels is a bullish sign for this fund going forward, and it could be the beginning of another nice run higher in this volatile market segment.

The chart here of FXI also shows that the last time this fund breached its 200-day moving average was in early October. That key technical breakthrough resulted in a subsequent 18%-plus run higher in this fund through its February high.

Given the nature of this momentum-driven, fast-money market, investors — and especially traders — should look at the FXI as being on the verge of another big run.

This would be the first time this fund has come back off the canvas nicely, especially after it has fallen below — then broken back above — key technical resistance levels.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/04/China-Stocks.jpg

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