China's Shanghai Composite Index in a Free-fall?

Trend: The ETF for the iShares FTSE/Xinhua China 25 Index (FXI) is down 12 percent in the last four weeks.

Dr Wish at the Wishing Wealth blog highlights the steep decline in China's Shanghai Composite Index below.

Link: China in Free-fall

Every once in a while the charts become so bad that they scare me.  I check a number of market indicators every night and was concerned by the current steep decline in the Shanghai Composite Index.  The weekly  chart (and monthly chart, not shown) are very ominous.  After a major decline (almost 70%) from 2007 to 2008, this index began a rebound in which it almost doubled from the bottom, until August of 2009. Since its August top, the Index declined and made another failed attempt to rise, topping out in November, 2009.  It then declined again and made one last feeble attempt to rise, topping out in April 2010.  When that rally failed, the Index broke down below prior support and now appears to be in a free-fall.  Where it will stop is any person’s guess, but we do know that China’s government is trying to cool the economy.  In the U.S., when the Fed tries to cool the economy from a boom, it usually ends with disastrous consequences for the market.  While I think a crashing China would have disastrous consequences for the rest of the world that has been banking (pun intended) on China to help the world recover from its recession, I can still look for a way to profit from  the decline in this Index, if it continues.  I have therefore purchased a little of FXP, the Ultra Short ETF that tracks the daily performance of the FTSE/Xinhua China 25 Index. FXP is designed to rise twice as much as this Index falls. I know these ultra ETF’s can be very volatile and I therefore bought a few shares with the idea of adding to my position if the decline continues.  What caught my attention was the largest weekly volume of trading in FXP the last few weeks as it started to rise.

 

So, the big boys are apparently buying FXP.  The volume of shares traded in FXP the past 5 weeks is the highest that it has ever been since this ETF started trading in 2008.  My students should see immediately from this weekly chart that this ETF may be completing a Stage 1 base and beginning a new Stage 2 up-trend.  It is still too early to know if this is happening, but I thought it was worth taking a small position in FXP, given the recent up volume (green bars). The other ominous situation I am tracking is the relationship between the China and the U.S. markets.  Both the China and U.S. markets declined steeply in 2008 and rebounded, but China’s market bottomed 5 months before the U.S. market. Now that China’s rebound appears to be over, could the U.S. market’s rebound also end  soon?

via wishingwealthblog.com