Chinese Large-Caps Still Look Vulnerable

by Serge Berger | June 4, 2013 9:53 am

China recently lowered its annual growth rate target for the decade down to 7%. To explore how — if at all — this could reflect Chinese stock prices, I explored the charts of the large-cap-focused iShares FTSE/Xinhua China 25 Index (FXI[1]) ETF for a view from the technical front.

Stock of the Week[2]Just like U.S. and European stocks, Chinese securities got hit hard during the financial crisis selloff. The FXI dropped a cool 70%-plus in the 12-month period from late 2007 to late 2008. From there, the FXI staged a sharp rally as global stocks rebounded, and ultimately found resistance in November 2010, just as it retraced roughly half of the 2007-08 selloff.

Since the November 2010 top, the FXI again fell lower, and eventually — after retracing 61.8% of the 2009-10 rally — found a higher low in October 2011. Since then, the fund has traded in a more narrow and choppier range, which on the multiyear chart below completed a long-term wedge pattern with a narrowing range.


Ultimately, these long-term wedge patterns resolve by breaking out in either direction.

On the daily chart of the iShares FTSE/Xinhua China 25 Index fund, we note that this ETF is still lower by roughly 10% year-to-date, thus far not having participated in the global stock rally of 2013. The FXI built a solid top in January, from which it cascaded lower by around 17% into a mid-April bottom. From there a rebound occurred, but it lost steam right as the FXI retraced 61.8% of the early February-April correction.


From here, odds now favor the FXI trading 5% lower to at least match its mid-April lows, which would then also retest the lower line of the multiyear wedge formation on the first chart.

Beyond that, it’s too early to tell whether the FXI will eventually break below the wedge pattern or rebound back to the upper end of it. What I do know is that an eventual breakout/breakdown in either direction will likely gain momentum and allow traders to hop on a bandwagon trade.

Serge Berger is the head trader and investment strategist for The Steady Trader[5]. Sign up for his free weekly newsletter here[6].

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