The following FXI chart from March 12 was part of the reason I was bullish on the fund.
You can see how the trendline acted as support and how the slow stochastic readings were oversold. There was also a fundamental factor behind the bullish posture, and that was the actions by the central bank of China to loosen monetary policy in order to reinvigorate the Chinese economy.
Since that first article appeared, the FXI has gone almost straight up. After closing at $41.28 on March 12, the fund closed at $51.98 yesterday. That is a 25.9% jump in a month and a half. And we are talking about an index-based ETF, not an individual stock.
The chart below shows what has happened since that first article, with the blue arrow denoting the date of March 12.
While I love seeing prognostications work out so well, I am now concerned that the fund has jumped too much in such a short period of time. You can see on the chart that the fund is overbought, and you can see how the 10-day moving average jumped way ahead of the 50-day moving average.
When the gap between two significant moving averages gets to be too wide, the underlying stock or fund has a tendency to either pull back or go through a consolidation period at the very least.
Looking at the weekly chart, we get an idea of what I am talking about, with one moving average getting too far ahead of another. In this case it is the 13-week moving average getting too far ahead of the 52-week moving average.
Here we are talking about the performance for the past quarter versus the performance of the past year. We see that there is a gap between the two moving averages of 10%. We also see how far ahead of the 13-week moving average the stock is at present.
Now, if you look at last September, we see a similar gap between the stock’s price and the 13-week moving average. The gap between the two moving averages is also similar to what we have now. Notice that the stock dropped over 10% in four weeks. Another similar instance occurred in early 2013, and then the stock dropped more than 25% over the next six months.
With the current monetary policy from China’s central bank, I don’t think we see a pullback like the one that happened in 2013. The scenario that played out last fall seems much more likely.
If you are a short-term trader, I think you could make money by shorting the FXI for the next month or two. For the long-term view, I am still bullish on the FXI and think it is a buy again after we see a pullback or a consolidation.
This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.