Chinese ETFs Break to the Upside
They say that the Chinese economy has emerged from the pandemic quicker than the rest of the world. Recent action by Chinese ETFs certainly underscores such a possibility, as many have broken out from multi-week consolidation patterns. I last wrote about Chinese ETFs back in July,when we considered a major breakout that had then been experienced by the Shanghai Composite.
Chart 1 sets the scene for the big picture, as it shows the breakout above a key down trendline that that had taken place at the time. You can also see that the long-term KSTis bullish and by no means overextended. For the most part, its bullish signals since 1996 have been followed by strong rallies. The dashed arrows, though, indicate that not all signals have been successful.
The key will be to see whether the index can complete the potential inverse consolidation head-and-shoulders featured in Chart 2. That would require a decisive Friday close that holds above 3400. You may think this situation is at odds with the title of this article. It's not, really, because Chinese-listed ETFs in the US are expressed in dollars and the Dollar/Yuan cross has been quite weak in the last couple of months. This has enabled the dollar-based ETFs to outperform yuan-denominated prices with some timely upside breakouts.
The largest Chinese ETF by AUM is the iShares MSCI China (MCHI), featured in Chart 3. You can see that the price has recently broken to the upside; this is being supported by a bullish long-term KST in the second window. The RS action against the S&P is more impressive since it has broken above a nine-year down trendline. Once again, the KST for RS (in the bottom window) is bullish but by no means overextended.
Its more recent action is featured in Chart 4.
The iShares China Large Cap (FXI) is another popular Chinese ETF. This one does not track the Shanghai Composite as well as the MCHI, as it consists of Chinese A Shares traded in Hong Kong. As a result, it has only gained 4% this year. That compares to the MCHI, which sports a 22% gain. Nevertheless, the price of this widely-traded ETF looks as if it is playing catch up, since it has just succeeded in clearing a very important resistance trendline as displayed in Chart 5. The RS line is still contained by its 2011-2020 down trendline. However, this resistance looks likely to succumb as the KST, for relative action has just reversed to the upside.
Chart 6 once again reflects more recent price action, where you can see that the price has just emerged from a consolidation reverse head-and-shoulders formation.
Two leading sector ETFs are the VanEck China AMC SME Chinext (CNXT) and the Invesco China Technology (CQQQ) funds, both of which are displayed in Chart 7. The CNXT has completed and broken out from a consolidation reverse head-and-shoulder patterns. For its part, the CQQQ has broken out from a 4-month rectangle pattern.
Not all sector ETFs have yet broken to the upside and deserve to be monitored for such an event. For example, Chart 8 displays the Global X China Financials. This sector, like its US counterpart, has been lagging of late, but may be about to experience better times. The price is just below its 2018-2020 down trendline. However, a move above it is likely, since the long-term KST, in the second window, has just gone bullish. The relative picture is less encouraging because its KST is still bearish. Until that status changes, it's going to be difficult for the RS line, in the third window, to break to the upside.
The RS action for the US materials sector has been improving in the US. Now it looks as if China is likely to follow suit. Chart 9 shows that the price of the Global X China Materials (CHIM) broke to the upside some time ago and has been consolidating ever since. Now that the long-term KST has gone bullish, I would expect to see an upward resolution of that range-bound action. In addition, the KST for relative action is positive, which suggests that the potential reverse head-and-shoulders will eventually be completed by the RS line itself.
Finally, we can see the X-trackers China A Shares Small Cap ETF (ASHS) in Chart 10. It has a similar path to the CHIM, in that a summer breakout was followed by a 4-month digestion of gains. Throughout this period, the long-term KST has remained in a positive mode, so I am expecting the trading range to be resolved on the upside. Something looks like it's going to happen, as the KST for RS action has gone flat and the RS line itself is resting above support in the form of its extended breakout trendline.
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.
