Bull in a China Shop

• Major Breakouts Coming Out of China
• Four Chinese ETFs

Major Breakouts Coming Out of China

Thursday's price action in China resulted in a powerful signal that Chinese equities are headed significantly higher. That should be bullish not only for China but for the world as a whole. In making that statement, I am assuming that that this market is in the process of anticipating an improvement in business activity. Since China is the world's number two economy, that could well help in ending the global slowdown.

Let's start off with Chart 1, which indicates a breakout from an eight-month reverse head and shoulders. Note that the neckline formed at exactly the same level as the opening of the April/May downside gap. It's a great reminder of the importance of such phenomena as potential support and resistance areas. The blue arrows show that the minimum ultimate upside objective from this formation is for prices to reach close to 3,400.

Chart 1

That's a nice move, but Chart 2 tells us that something far more important is happening. Three points are worth noting. First, the Index has broken above its bear market trend line and cleared its 12- and 24-month MAs. Second, it violated its secular uptrend line at the end of 2018 and has now moved back above it, a fact that is confirmed by the breaking of that green 2015-19 downtrend line. Whipsaws of this nature are often followed by above-average moves, as market participants quickly attempt to get back on the right side of the trend. That means we should be prepared for some possible unexpected explosive upside action. Finally, the 18-month ROC has broken above its 2007-19 downtrend line in a similar manner to its 2006 action. I am not predicting that we will see a similar advance to that which culminated in the 2008 peak, but something big is definitely happening here.

Chart 2

Chart 3 shows the same chart but in greater detail, so you can see how close the Index came to a second penetration of the secular uptrend line.

Chart 3

Finally, Chart 4 features a chart from my monthly Chinese newsletter. It monitors a universe of Chinese stocks in a positive trend. Green indicates when it is above its 15-week MA and red when it is below. The arrows show when the indicator bottoms from a low level. That occurred a while ago, but the indicator is now operating on all systems go as it is above its MA once again.

Chart 4

Four Chinese ETFs

There are quite a few listed Chinese ETFs, but most are fairly illiquid. The most popular is the iShares China Large-Cap (FXI), which comprises Chinese A shares listed in Hong Kong and is not therefore a "pure" Chinese play. Regardless, Chart 5 shows that it has just broken out from a 2-year inverse head-and-shoulders. Since two of the momentum indicators are in a positive mode, that should ensure high enough prices to result in a long-term KST buy signal.

Chart 5

Chart 6 tells us that relative action of the FXI against the S&P has yet to break its downtrend line. The declining KST for relative action is another problem that needs to be cleared up.

Chart 6

It has been widely reported that the Chinese authorities have been trying to re-balance the economy away from infrastructure towards the consumer. That should be bullish for consumer stocks. In that respect, the China Global X Consumer ETF (CHIQ) looks as if it is poised to move higher, as it has rallied back to its previous high set at the beginning of 2018. The rising long-term KST in Chart 6 suggests a breakout is on its way. Relative action versus the S&P is also poised for a breakout, as we can see from the third panel of the chart. Finally, the long-term KST for relative action in the bottom window is very slightly leaning to the bullish side. If the RS line itself can push above its resistance trend line, that relative KST is likely to move decisively to the bullish side.

Chart 7

Our third and fourth funds have been the focus of our attention in recent editions of my monthly Intermarket Review. The Deutsche Tracker Harvest CSI 300 (ASHR), as seen in Chart 8, specializes in Chinese A Shares and has broken to the upside. The support provided by three rising KSTs is encouraging.

Chart 8

Chart 9 tells us that its relative action is trading right at its 65-week EMA and green resistance trend line. However, the long-term KST for relative action, unlike the FXI and CHIQ, is positive, placing it in a stronger technical position than the other two.

Chart 9

Finally, Chart 10 features the Van Eck Vectors China AMC SME Chinext ETF (CNXT). This fund is exposed to innovative non-government companies. I always think of it as a Chines NASDAQ, although the comparison is not exact. It's fairly evident that the price has just vaulted through a four-year downtrend line against the backdrop of a positive long-term KST. Finally, this week has seen the RS line rally above its downtrend line, as well as its red 26-week EMA. It too is backed by a very positive long-term KST.

Chart 10

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.