Is the China ETF Ready to Soar?

Zacks

China has recently been in the spotlight after the economy grew at a modest pace in the fourth quarter following a dismal performance in the preceding quarter. While the growth recently hasn’t been China’s best by any means, it surely does hint towards a positive trend that could very well prove to be crucial for the global economy going forward.

Some of the reasons for this key turnaround are thanks to a favorable investment climate and stepped-up policy initiatives from the country’s government. Beyond that,  an increase in domestic demand fuelled by a rising middle class, and surging industrial production have also boosted Chinese prospects in the near term (read Try Small Cap ETFs to Gain from Chinese Domestic Demand).

With this backdrop let us have a closer look at the Chinese ETF, the iShares FTSE China 25 ETF (FXI) which seems to be decently poised for a further up trend even from the current high levels.

A look at the long term price chart of the ETF reveals a neutral to bullish picture. After bottoming out very nicely from mid June till September at around $32 the ETF witnessed a breakout of the then resistance of $35.50. Since then, FXI has continued its long trek upwards and has currently reached its 52 week high and is hovering around it.

Also, the trend seems to be on a positive side for the ETF as the bullish crossovers for the 50 and 100 DMA lines (blue and red respectively) over the 200 DMA line (green). This trend seems to be having some fuel left as indicated by the upward sloping pattern for each of these moving average lines (read Gold ETFs: Is the Sell-Off Overdone?).

Now let us have a look at the short term price pattern of the ETF. The chart below is a 6 month daily price chart of FXI and the overlay used is Bollinger Bands.

As is clearly evident from the recent trading pattern of the ETF, it is directionless and choppy. Since the beginning of the year the ETF has witnessed a pretty range bound trading action unlike most of its U.S. broad market counterparts.

Therefore, the underlying volatility of the ETF has clearly diminished. Not surprisingly, the Bollinger Bands also bear resemblance to this fact.

The bands have clearly witnessed a contraction of late which is a sign of reducing volatility and lack of a clear cut direction. However it is prudent to note that the bands usually exhibit similar characteristics just before a significant bullish or bearish breakout due to its mean reversion characteristic (read Can India ETFs Continue Their Solid Run?).

In any case, viewing the long as well as short term charts in isolation does not reveal a clear cut direction pattern for FXI and it is very difficult to predict a trend from the charts individually. However, by combining the short as well as long term analysis it is possible to arrive at a more concrete assertion about the future course of action for the ETF (see 3 Ways to Play the S&P 500 Rally with ETFs).

While the long term price chart tells us that the ETF is fairly neutral with a bullish bias, the short term chart tells us that the ETF is brewing towards a more violent movement — either upward or downward.

However, with the economic fundamentals of the Chinese economy improving, one could well imagine that the recent subdued trading action for FXI is just the calm before the storm upwards, at least in the near term.

Nevertheless, the ETF might continue to witness choppiness in the subsequent few trading sessions as indicated by the RSI reading of 61.47 which is tending towards the overbought territory. The same is concurred by the Williams R indicator with a reading of -31.42.

Thanks to this we are a little uneasy about China ETFs at this time, but believe that they could be poised to surge in the coming days. The longer term picture is a little more clouded, but at least right now, the space could continue its technical momentum to new heights in February.

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