While the U.S. stock market (SPY) has languished since the Fed’s QE3 announcement back in mid-September, another major market index has surged back to life. China stocks as measured by the iShares FTSE China 25 Index ETF (FXI) has exploded higher by over +23% in the last few months.
The FXI has arrived at a critical juncture following this recent surge. The $40 level on the FXI has served as both critical support and resistance for the last half decade. For it was back in 2007 when the FXI first broke decisively above $40 to reach its all-time highs in October of that year. The $40 level also represented critical support in 2008 leading up to the outbreak of the financial crisis when it finally broke decisively below. And the FXI desperately clung to support once again after reclaiming $40 from mid-2009 to mid-2011. And $40 has represented stiff resistance in the 18 months since. But as we move toward the end of 2012, the FXI is making its latest run at reclaiming the $40 level.
How the FXI performs as it approaches the $40 in the coming trading days will be particularly important. For if its able to break out decisively above this critical resistance, the potential for further upside on the FXI is meaningful. However, a breakdown at this level could result in a swift retracement back to the $32 to $37 range.
Forces beyond the charts suggest that the FXI will eventually find the steam to breakout above $40 in the coming months. Most significantly, it is expected that the People’s Bank of China will embark on another monetary stimulus program in support of the new government under Xi Jinping as it transitions into power between now and March 2013. Even if the Chinese economy shows signs of slowing, aggressive policy stimulus have shown the ability to more than overcome these forces to push stocks higher, and any future program will likely be no exception.
Disclosure: I am long China stocks via the FXI
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.