Potential China Inflection: FXI ETF:

15 Apr

Conclusion: FXI has reached a potential inflection point. The outcome of the current technical setup is likely to define the direction over coming months, and will likely result in significant low risk trading opportunities.

FXI, is the China Large Cap ETF that holds the 50 largest large cap Chinese stocks trading on the Hong Kong exchange. FXI is currently in the process of making a secondary test of its 2022 low. Either a successful test leads to a show of strength, or a failed test creates a show of weakness. Either outcome has the potential to produce a meaningful directional move offering multiple trading opportunities. This is precisely the kind of setup or juncture around which I like to build agnostic trading plans. I will have a trading and risk management plan in place to take advantage of either outcome.

In 2021, the market began a vicious decline (-60%). The decline from the February 2021 high occurred on rising volume and wide price spread (suggesting strong handed selling). The move was clearly impulsive.

A temporary selling climax developed (arrow). The minor climax produced a small automatic rally that quickly ran into resistance. The market then devolved into a 4 month show of weakness. This zone now represents significant resistance.

The show of weakness occurred on wide price spread and relatively high volume, before potentially developing a complex selling climax (SC) at 20.87. Note that, while in this perspective the SC appears complex, it appears more traditional in the daily perspective.

The automatic rally (AR) lasted 4 months and found resistance in the same zone that turned the market lower in March of 2022.

After testing the resistance, the market began setting back toward the selling climax low (20.87). Note that during the most recent decline, the angle of decline has been shallower. The shallower angle and moderate volume suggests far less supply entering than on the prior decline.

The solid expansion of volume around the recent low (ST?) suggests strong handed buying and that the secondary test may be complete pending a show of strength.

As the market has advanced from the ST 20.87 low, volume and price spread have been declining. While supply seems limited, demand is still lacking. Odds of a setback to test 20.87 again are fairly good.

I think it’s premature to conclude that the secondary test is complete. But if the market begins working its way above the downtrend that is defining the potential test (A-B), particularly if volume and price spread expand, it would likely signal a completed test. This would allow me to begin utilizing bullish setups with a high degree of confidence. Conversely a developing trend below the support would allow me to begin utilizing bearish setups. Either way, the potential for a significant move is high.

I prefer secondary tests that are well separated in terms of time and that come close to fully retracing the climax structure. This structure certainly qualifies in both respects. I would prefer to see a deeper cut toward the 19.81 low, but 20.86 is close enough.

And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

Good Trading:
Stewart Taylor, CMT
Chartered Market Technician

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