Wanted to make a quick update of two separate markets before we moved on to this week’s analysis and trade recommendations.
We’ll start with the Chinese market.
Stocks in Shanghai have moved into a bullish technical posture the likes of which we haven’t seen since the spring of 2008.
It’s early going yet, so things could reverse in a jif, but we’ve a hunch that stocks in that bastion of commie central planning are about to lift off. And that’s certainly good news for us freedom-loving angels here in the good old U.S. of A.
Here’s a chart of Chinese market proxy iShares China Large-Cap ETF (NYSE:FXI) for the last six-months. Pay close attention to the moving average configuration on the far right.
The move from $32 to $42 over the last half year was in itself monumental, and the trend channel that defines the rise shows that price is currently sitting directly in the middle of that track – neither too hot nor too cold (in red, far right).
Indeed, the latest RSI and MACD reads (in black) offer the same assessment, which is, that today we have no worries about an ‘overbought’ market situation in Shanghai.
But where the chart is most interesting, as mentioned above, is in the latest development in the moving averages. The dailies have not been unfurled and trending higher since six-months before the Lehman Bros. breakdown of 2008 led the stock market lower by 50%.
At that time the Chinese market had reached all time highs at FXI $72. Now, we’ve got a ways to go before we reach that level, to be sure. But it could be this latest technical signal marks the beginning of the move that gets us there.
Don’t mean to pile on here, just to present the facts.
Gold, too, recently hit an historic marker, though certainly less dramatic than the Shanghai market, above.
With the dollar trading higher of late, we’ve seen all the precious metals under pressure and falling. Gold now sits where it did during the first week of the year, at $119. It has fallen 10%, and its chart, represented by the SPDR Gold Trust (NYSE:GLD), looks as follows –
1. There are no signs of a selling climax evident in recent volume figures (in blue), so we have to assume that the move (lower) is still incomplete.
2. We’re also taking the break below the last retracement bottom (in early June) at $119.50 as a sign that there’s more downside to come.
3. The imminent unfurling of the moving averages, all of which are currently trending lower, is also bad news for the metal.
4. If there’s any hope for the bulls, it resides in a stretched RSI indicator, not quite at the oversold 20 read that would mark a deeply oversold bottom, but fast approaching.
Our take, therefore, is that the bear continues to hold the upper hand, and that any thoughts of a bottom are vanity, vanity and empty vanity.
Gold could bounce temporarily, but the next stop for the metals more likely to be its 52-week bear market low at $114.46.
And if that were to happen, we could see GLD declining without any meaningful support whatsoever.
Take a look at the weekly chart –
What the chart above is attempting to show, is that GLD declining to her former bear market lows at $114.46 (red line) would necessitate her traversing below the long term weekly moving average (in yellow), a threshold that once broken would most likely open a floodgate of selling.
From Shanghai and Gold, we turn our attention now to an open trade that requires your attention.
It was back on February 24th in a letter called Downside Betting on Freeport and the Utilities that we recommended two separate debit spreads on the Select Sector SPDR Utilities ETF (NYSE:XLU), one using CALLs, the other using PUTs.
On the 5th of May in Noah Would Have Bought CALLs, we closed our long CALL position for a nice profit. It was bought at $1.40 and we sold it for $2.34 for a gain of $0.94 or 67%.
To our dismay, however, the PUT side expired in June and we lost the full $0.22 invested.
And today, we’re closing the short CALLs because we see little hope of an imminent drop for the stock.
The numbers look like this –
We urged you to sell the January 2015 42 CALL for $0.92, and today it trades for $1.22. Buy it back for a loss of $0.30 and consider the trade closed.
Final tally is $1.44 gained on $0.90 invested or a 60% gain.
We don’t remember the last time we looked at a trade using the fast-food sector, but it appears the time has now come.
Dirty Russian Meat
In the ongoing tit-for-tat sanctions game against the Russians for their neo-imperial ambitions, the former leader of the global satanic communist movement saw fit to strike back by closing twelve McDonalds (NYSE:MCD) restaurants domiciled in that former soviet hell and ‘inspect’ 100 more for alleged sanitary violations.
That was bad enough. But following as it did on weak global sales numbers for its last quarter, the stock took a nosedive, plummeting some 13% since its mid-May highs at nearly $104.
Here’s a look at the chart for the last six-months –
• To begin, we have positive divergence from both RSI and MACD for over a month now (in blue), a bullish development.
• Coupled with that, we see an increase in volume as the stock fell to new lows last week (in black) – also bullish.
• Third, we fell in love with last week’s Bullish Engulfing Pattern, a Japanese candlestick formation that speaks to an immediate trend reversal.
We highlight it here –
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The pattern speaks to a move higher at least to the longer term moving averages in the $97/$98 region.
Wall Street Elite recommends you consider the purchase of MCD October 97.50 CALLs for $0.33 and sell the MCD October 90 PUTs for $0.37, for a total credit to you of $0.04 per pair traded.
With kind regards,
Hugh L. O’Haynew, Senior Analyst, Normandy Research