Reports Wednesday of China's economic problems dragged global stocks lower. China reported the softest reading in its purchasing managers' index since December. Interesting.
In my review of the iShares China Large-Cap ETF (FXI) and Alibaba Group Holding (BABA) on Jan. 17 I wrote, "I still look for the FXI and the Chinese economy to weaken. Avoid the long side of FXI and BABA."
Now that China's weakness is front page news (replacing the positive reopening news) I wonder if we need to "lean into the wind?"
Let's check out a few charts.
In the daily bar chart of FXI, below, I can see that prices made a low in October and then rallied into the end of January. The FXI has made two "legs" lower. A decline from the end of January to the middle of March was the first leg. A second leg lower from the end of March to the end of May. The FXI trades below the declining 50-day moving average line and the declining 200-day line.
The On-Balance-Volume (OBV) line shows a decline from the end of January. The 12-day price momentum study shows us higher lows from February even as prices have made lower lows. This tells me that the pace of the decline has been slowing and creates a bullish divergence when the indicator is compared to the price action. Divergences are imprecise timing tools but are still worthwhile to follow.
In the weekly Japanese candlestick chart of FXI, below, I see a mixed picture. The most recent weekly candle is a spinning top with a small real body. This pattern suggests that buyers and sellers are getting in balance. The shares are in a decline and trade below the 40-week moving average line.
Trading volume has been shrinking and suggests that prices may have been falling of their own weight. The weekly OBV line has declined telling me that sellers have been more aggressive than buyers. The Moving Average Convergence Divergence (MACD) oscillator is now below the zero line in sell territory.
In this daily Point and Figure chart of FXI, below, I can see that the software is projecting a potential downside price target in the $24 area.
In this weekly Point and Figure chart of FXI, below, I can see that the shares met a downside price target in the $26 area. Reaching a technical price target is not a great reason to buy but it may influence shorts to cover.
Bottom-line strategy: After years of being a market observer I believe in the old saying that "news follows the tape." The FXI weakened from the end of January and now the news headlines are bearish. I am probably early, but I would start looking for fresh buy signals on the FXI instead of projecting further losses.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
