Saturday, March 31, 2007

Divergence In China

Here's a trade I'll be watching for next week.

The top chart is a daily chart of FXI and below that is a chart of the Shanghai index. Notice how the two markets both trend together. Both markets had an accelerated move up from November going into January but notice what is happening now. The Shanghai index (bottom chart) continues to make higher highs while FXI makes lower highs. This is bearish for FXI in my opinion and I will be looking to short FXI next week.

On Friday FXI was down close to 2% on an increase in volume. Notice also that FXI just about filled its gap today when it rallied up to the 105 area but then turned south and closed on its lows forming an outside day bearish engulfment.

If FXI can break below its 3 week uptrend (blue trend line), I'll be looking to get short with a protective stop above tha gap (above 105).


asbestos_handkerchief said...

Correct me if I'm wrong, but I think FXI is a fund of bluechip Chinese stocks, while the Shanghai Comp Ind is just all stocks, bluechip and speculative.

I heard on Bloomberg that most bluechip stocks are well off their highs. So my best guess is that it is the speculative stocks that are driving the index gains in Shanghai, while the lagging bluechips drag down the FXI. Also, the weighting of stocks on the Shanghai Comp Ind is different, and I'm pretty sure that heavyweight bluechips don't move the market as much as they do in the US.

Kevin said...

Hi Abesstos,

I agree with you but the two markets do trend together and if one is diverging, that gets my attention.

Lets assume the two markets are unrelated, I'm still bearish on FXI because tecnically this ETF filled its gap and had a bearish engulfment on an increase in volume.

Thank you so much for your comments.. I appreciate it.

Stimit said...

I have noticed that day-to-day, FXI seems to significantly overshoot or undershoot the Shanghai composite. What stocks does FXI hold? Are they US listed stocks or part of the composite/Hang Seng? Isn't it true that foreigners are not allowed to purchase stocks directly in the Shanghai market so they buy Hang Send listed shares instead?

Kevin said...

Here is a list of the top 10 holdings in FXI:

China Mobile Ltd
PetroChina Co Ltd
Industrial and Commercial Bank of China Ltd
China Life Insurance Co Ltd China Petroleum and Chemical Corp (Sinopec)
China Telecom Corp Ltd
Bank of Communications Co Ltd
China Construction Bank Corp
BOC Hong Kong (Holdings) Ltd

asbestos_handkerchief said...

Don't get me wrong, I think the two are very related. But the divergence between blueys and specs do pose a concern.

Either the blueys will play catchup, or vice versa.

Anyway, a MACD divergence is emerging on the Shanghai Comp...

LKH said...

I think FXI only holds Chinese companies listed in Hong Kong stock exchange. People call it the H-share. Some company, China Life Insurance for example, also lists in Shanghai and is called the A-share. Foreigners cannot directly buy Shanghai listed shares. The stock price of H-share and A-share can diverge significantly. You can take China Life Insurance for example.


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