What’s Next for the Chinese Markets?

Editor’s note: Today, we’re handing the reins to colleague Larry Benedict – a market wizard and legendary hedge fund manager.

He’ll explain what may be in store for the Chinese markets…

Here’s Larry…

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A sinking property market has been a common theme of the Chinese economy over the last few years… alongside a falling stock market.

The iShares China Large-Cap ETF (FXI) invests in large-cap stocks including Tencent, Alibaba, and the Bank of China. After hitting its peak back in February 2021, it fell steadily through the start of this year.

By the time FXI bottomed out in mid-January, it had lost around 62% of its value.

We checked in on FXI in late February (red arrow in the chart below), though. And it was showing promising signs of a bounce.

So, let’s check back in today to see how things have unfolded and where FXI could be heading next…

Higher Lows

In the chart below, the 50-day Moving Average (MA, blue line) shows its long-term downtrend through early this year.

The 10-day MA (red line) bearishly tracked below the 50-day MA throughout FXI’s downtrend (aside from brief countertrend rallies in July 2023 and November).

iShares China Large-Cap ETF (FXI)

Source: eSignal

This bearish sentiment coincided with two other technical signals:

1. The Relative Strength Index (RSI) stayed predominantly in its lower band (below the green line).

2. After the July peak, the blue MACD line crossed beneath the orange Signal line. Both then fell below the zero (0.00) line as FXI’s downtrend continued.

FXI bottomed out in January, though. The RSI formed a ‘V’ in oversold territory (lower grey dashed line).

When we looked at FXI in February, it had begun to rally. The RSI was making a series of higher lows (diagonal orange line).

That rally developed further with the RSI breaking back into its upper band (above the green line).

Adding to the bullish sentiment, the 10-day MA crossed back above the 50-day MA. And the MACD line crossed and dragged the Signal line back into its upper range, where it has remained since.

Despite these positive signals, however, FXI’s rally is hanging right in the balance…

Take another look:

iShares China Large-Cap ETF (FXI)

Source: eSignal

The RSI has stayed mainly in its upper band. But it hasn’t gained much traction. The RSI is bouncing along support (and recently dipped briefly below it).

Likewise, the MACD is moving in its upper range. Yet it has been slipping back toward the zero line.

For FXI’s rally to develop further, I’ll be watching several things from here…

The Next Test

After recently dipping below support, the RSI has crossed back into its upper band. For FXI’s rally to gain further momentum, the RSI will need to rise longer and higher in the upper range.

We’ll also need to see the 10-day MA accelerate above the 50-day MA with both MAs tracking higher.

The next test for FXI’s rally would be to break above and hold short-term support at $25 (horizontal orange line).

Finally, there’s the MACD. As I mentioned, it is tracking just above the zero line.

For FXI to rally, the MACD line needs to cross back above the Signal line and keep rising.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict