FXI UPDATE - NO MAN'S LAND OR BREAKDOWN? (TRADING UPDATE)

A reader, let's call him P.T., sent me an email this weekend and I wanted to respond to his questions on FXI.  Here is P.T's question. -


Hi Goatmug

"Just wanted to ask a question about FXI. I saw a post on your site about FXI and China markets. I was waiting to take a LONG position (long term) on FXI few weeks ago but after i saw your update i changed my opinion and wait and see mode. I noticed FXI going up from last few days and now trading above 200 DMA; I was wondering if you still had your short position on short side ? Would you still continue to recommend shorting FXI ?"

First of all PT, thanks so much for reading and thank you for sending an email. 
Here was my response to PT -

"In my opinion we are in no-man's land with FXI right now. You are correct we are above the 200 dma which is right at $42 (where I was looking for a downside break). Having said that, this only gives you about $1 upside to the 50 dma which seems to be pretty good overhead resistance.   Personally, I wouldn't enter a long or short till we break out of either of these moving average bounds. If we pop over the 50 dma, it may be a good long candidate.


The surge over the last couple days does have me confused though, and I'm wondering if the increase from $42 the other day is more attributed to a currency move rather than a fundamental improvement of China prospects. They did increase rates and this would normally put a damper on the upside of stocks in general, but as with everything in the emerging market area it may be a result of a relative value play (in the sense that the US growth prospects are lower and even a China with a government attempt to trample down overheating hot money is perhaps more attractive). The biggest concern I have is that China and the other emergings may get so serious about inflation and combating it that they simply crush all speculation and over do it and pop their bubbles. I think this Bloomberg article underscores my view about the risks.
http://www.bloomberg.com/news/2011-02-20/hsbc-says-avoid-china-s-equities-until-second-half-on-inflation-measures.html

Having said all that, I still believe that FXI is just one to avoid going long, or better said is still a short from a fundamental perspective. 

I hope that helps."


TRADING UPDATE - 2/22/2011

Well wouldn't you know it, after writing this response we see that markets are a bit shaky this morning and all emerging markets plays are weaker and gold and silver are up quite nicely based on the unrest all over the world.  I've captured a couple of screen shots of what I'm watching and I have resisted on doubling down on my FXI short that I have held for a couple of weeks.  I have been underwater in that position all of this time, but since the open this morning I am now even and have clear momentum on my side.  If we get through the next hour and look weak I may add to my put position, but frankly I doubt it.  We have seen so many wacky reversals that there is no sense in getting crazy.  The key  here is that FXI is now clearly under the $42 area that I was targeting and I see some minor support at $40 on this descending channel and also more support around $39.00.  A move through those areas brings $36 into play.

Weekly Chart - FXI

Another weekly chart with the 14 ema and the 40 ema - (long term indicators).  The 14 day ema has not crossed over the 40 yet, but it is really close.  If it does, that would be a significant long term sell alert.

Here is another chart I am watching with the same macro-themes, but with the added issue of concern that Bangladesh is a next door neighbor to India.  In Bangladesh the populous is outraged and investors are rioting about the collapse of their stock markets.  In one day their stock market was down over 9% and has been down over 30% in recent weeks.  If this unrest comes to India watch out!  From a technical perspective, PIN (Powershares India), the 14 EMA has crossed down below the 40 day EMA which is very bearish.

$23 is a great stop for a short and $20 is a good short term target.

Be Careful!

GOATMUG