From Rio to Shanghai! (FXI,NOC,AAPL?)

From Rio to Shanghai! (FXI,NOC,AAPL?)

 

It’s always surprising to us just how much dissonance can exist between the news on a stock or sector, on the one hand, and the actual price moves for the security, on the other.

 

It can be outrageous.

 

So, for example, when you see the financial press go to town on Brazil or Twitter or the auto industry, it behooves you as a clever investor to take a look under the hood, kick the tires and offer a good long gaze at the nearest Brazilian Twitters you can find.

 

For the results are bound to surprise.

We bring this to your attention because the current sound and fury surrounding the financial picture in China is one of awesome dread.  The Chinese banking system, you’ll read, is weak in the face of both credit and asset bubbles; the recent investment downgrade by Moody’s will gut the desire for Chinese securities; the rejigging of the currency peg – a move that took everyone by surprise – should scare the beJesuits out of you; the commodities glut… in fact, nearly every reason to avoid, flee, short or outright assassinate your Shanghai investments, is now spread before us like a patient etherized on a table.

 

Here’s how the currency responded to the Moody’s news –

And there’s more.  Talk of military conflicts with China, intended and unintended, continue to dominate the news cycle, whether it’s related to fallout from a nuke-happy North Korea and our desire for regime change there, or from provocations and counter-provocations large and small in the Spratly Island Archipelago of the South China sea, the watchword for investors has been a uniform ‘Keep Out!  This can only end badly!’

 

So, too, with China’s gathering sea of debt –

Unbelievable.

 

The rate of debt growth in China has to be scaled back – and likely in a hurry.

 

And so on, and so on…

 

And yet…

 

The actual moves on the Chinese indexes tell another story altogether.

 

The chart below is a wonder.  It’s six months’ worth of the iShares China Large Cap ETF (NYSE:FXI), the most widely traded proxy for the Chinese market this side of the Pacific, with an average daily turnover in the $700 million range.

 

Have a look –

 

Why ‘a wonder’?

 

Well, to begin, both RSI and MACD indicators have moved solidly north of their respective waterlines (at bottom, in green), indicating that we have unequivocal bullish momentum behind us, and, until an ‘overbought’ situation emerges, we’ll likely continue to see gains.

 

More than that, we also have all the moving averages unfurled and trending higher (black box), a situation that came into being just last month – and one we haven’t seen on FXI stock for better than two years!

 

But the real kicker here is that FXI traded at new 52 week highs at the end of last week (in red), breaking above former resistance at $39.85 and setting the stage for further gains, either immediately, or after a retest of support at that same $39.85 line (in blue).

 

Isn’t it always the case…?

 

There’s a reason for all those pithy maxims that are tossed about on Wall Street, and in this case, too, we can see why they’re relevant.  For the market, indeed ‘climbs a wall of worry.’

 

The Shanghai Market supplies us with more than ample Brazilian Twitter to back that adage up.

Does that mean we’re going to see big gains out of China?

 

It could.  The longer term indications speak to a sizeable surge, somewhere in the vicinity of 25% to 30% depending upon how one reads the charts.

 

Our own take on the matter is based on the weekly paste-up for FXI, which looks like this –

  • We’ll start with RSI and MACD, which have been strong for almost a full year. With both trending above their respective waterlines, the intermediate-term prognosis is clearly bullish (in green).
  • Beyond that, three waves down on the weekly chart (numbered, in red) indicate an end to the selling occurred back in June of 2016, while a reverse head and shoulders formation (also red) confirms that any selling at this point should be of a restrained and temporary variety.
  • Price has popped robustly above all her weekly moving averages, and, at the same time, the neckline for the head and shoulders reversal (in blue) has also been cracked.
  • According to our read of the chart, the upside count on the H&S reversal should bring FXI to the $52 level before traders begin looking for profits.

 

And that’s a hefty gain.

 

How long it might take to unfold is a separate question.  That’s why we intend to give any trade we initiate on FXI a lot of time to play out.  There’s no predicting the timeline here.

 

Hold Up, Huey!

 

Before we get to the details on this week’s trade, let’s close down an initiative we opened just a month back.  The letter was called Financial Drone Strike, and there we urged you to consider purchasing the NOC January 19th 250 CALL for $11.10 and selling the NOC January 19th 250 PUT for $16.10.  Total credit on the trade was $5.00.

 

And now?

 

Today, the CALLs sell for $17.00 and the PUTs go for $10.30.  Sell the former and buy back the latter and your take is a whopping net $11.70 on nothing laid out.

 

In a month.

 

Beats a fall in the nettle patch.

 

And now the moment you’ve all been waiting for…

 

We’re going to venture to the land of commie prison camps for our trade this week and make a bet on the mid- to long-term prospects of the Shanghai big caps.

 

We’ll use the aforementioned iShares China Large Cap ETF (NYSE:FXI), and the trade details are as follows –

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

With kind regards,

 

Hugh L. O’Haynew

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