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Is This China ETF About To Surge?

Zacks Equity Research

Besides the surprising good news on the jobs front, a majority of the recent economic releases from the U.S. as well as across the globe have been quite weak. This points once again to the dreaded summer slowdown which has been the trend for the past couple of years.

Beyond the U.S. market, the world’s second biggest economy, China, has also been facing a bout of weakness. The country is seeing extremely weak data and many are wondering if the country can pull it together later this year (read What Does Your Income ETF Focus On?).

After all, 2013 has been a pretty rough start for the Chinese markets pretty much across the board. Manufacturing in the country has been slowing down, and this pessimism is being reflected in the country’s equity prices (see Buy China on the Dip with These 3 ETFs).

China ETFs have certainly not been immune to this trend as they too have seen extreme selling pressure. Take for example the 6 month price performance of the SPDR S&P China ETF (GXC) as the ETF has been in a sluggish pattern for much of the year.

As we can see, the ETF has been in a steep downtrend almost since the beginning of this year. However, recently it has broken above the three and a half month long downward sloping trendline (green encircled portion) near the $68-69 range. However, this fact alone cannot suggest a trend reversal pattern for the Chinese ETF.

The following chart depicts a slightly longer term picture of the ETF and exhibits its one year price performance.

It is clear from the chart that the current level is an extremely important one for the ETF. The 50, 100 and 200 EMA lines as well as the current market price of the ETF are trading at a very close proximity. A movement either way from the current level will surely establish a short term trend for the ETF.

The ETF had found a bottom and rebounded from the $66 level to $the mid 70s. But of late it has been again witnessing choppy trading which symbolizes the importance of this level with neither the bulls nor the bears having control at this point in time (see Is It Time to Buy China ETFs?).

Also, taking a closer look at the Bollinger Bands, it has been witnessed that the bands are starting to expand with the price line touching the upper line. This is a bullish indicator, as the subdued trading could be making way for the bulls to reign.

Still, it should be noted that the recent rebound has caused the ETF to trade in the overbought territory as indicated by the Williams R reading. This signifies that the ETF might witness some more choppy trading in the days to come until the overbought reading cools off somewhat (see The Right and Wrong Ways to Invest in China ETFs).

In this regard, investors seeking a long position in GXC will be better off riding out the current volatility and waiting for a clear breakout above the moving average lines before initiating a long position.

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