While my indicators are giving bullish signals, I wouldn’t be surprised to see a pullback in the near term. I think that’s even more likely because President Trump is getting ready to ramp up the rhetoric against China again, which will only bring more uncertainty to the markets.
And with more protests starting in Hong Kong, I think a bearish position on iShares MSCI Hong Kong ETF (NYSEARCA:EWH) is a great way to add some bearish protection.
The Future of Hong Kong is Unclear
I’m not suggesting traders start fighting the Federal Reserve. When we last looked at the Fed’s balance sheet (data from May 6), it stood at $6.7 trillion. As of May 27, that number has increased to nearly $7.1 trillion. That’s an unfathomable figure and one that the bears on Wall Street simply cannot compete with.
But Hong Kong is in a very bad situation. If you recall, the protests last year started because of a bill that would allow extradition to mainland China. Even though the bill was withdrawn, the protests didn’t end, and they only died down because of the COVID-19 pandemic.
The protests have started back up because China has planned a new law for Hong Kong that bans “sedition, secession and subversion against Beijing” according to CNN Business.
This week, Secretary of State Mike Pompeo said the U.S. no longer considers Hong Kong independent from China, and that threatens to end the U.S.’s “special relationship” with the city.
This announcement could mean any number of things for Hong Kong and the many companies that operate there, but it’s safe to say an end to Hong Kong’s exclusion from tariffs on Chinese goods — or any number of other consequences — will be bad for its economy.
EWH is an exchange-traded fund (ETF) that provides exposure to Hong Kong’s stocks, and if they suffer because of this new uncertainty, the ETF will follow them down.
EWH Could Retest its Lows
The S&P 500 probably won’t retest its lows if it does pullback, but the political turmoil in Hong Kong could easily push EWH back to its recent low under $18.
Daily Chart of iShares MSCI Hong Kong ETF (EWH) — Chart Source: TradingView
If you look at the chart above, you can see that it does have some support just above $19. If there is enough bearish sentiment in the market to push the major indexes lower, I’m betting EWH will suffer slightly more and drop below that support level.
I don’t want traders to wait around for a profit at EWH’s lows if a bigger pullback never comes though, so I’m setting the strike price for our bearish put position at $19.
Buy to open the iShares MSCI Hong Kong ETF (EWH) July 17th $19 Puts (EWH200717P00019000) at $0.80 or lower.
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