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How to Short Chinese Equities with iShares China Large Cap ETF

12/11/2017 12:35 pm EST

Focus: ETFS

Landon Whaley

Editor, Gravitational Edge

Trade idea: As long as FXI trades below $49.85, then new short trade ideas can be initiated between $44.71 and $47.60. Depending on how much room you want this trade idea to move, use a risk price between $48.14 and $49.85, suggests Landon Whaley of Focus Market Trader.

The iShares China Large Cap ETF (FXI) declined 59 basis points in the week ending December 8, but still holds a 29.6% gain for the year.

Last week’s decline in Chinese equities occurred despite a pick up in the data stream from November.

The latest service sector and composite PMI readings bounced from the 2017 lows in October. November trade data also had a nice bounce, showing an acceleration in both exports and imports.

Despite the bounce, one month does not a trend make. The slowing economic picture may not have shown up in the data for one month but it’s rearing its ugly head in the commodity space.

China is a huge driver of commodity prices and as Bloomberg reports, metals traders are starting to price in slower Chinese growth. “The nation’s fixed-asset investment in infrastructure will grow 12 percent next year, down from almost 20 percent in the first 10 months this year. Copper has borne the brunt of the nervousness and prices are near a two-month low.”

I’m not impressed with November’s data and it certainly doesn’t deter me from continuing to carry my short bias.

FXI’s 4.7% decline since hitting its 2017 high on November 14 means that the Quantitative Gravity for Chinese equities is finally aligning with its bearish Fundamental Gravity.

When a market’s bullish Quantitative Gravity flips the script and aligns with its bearish Fundamental Gravity after months of disconnect, there’s only one thing to do…

Provide a trade idea that will allow us to get short Chinese equities and go huntin’ for wabbit.

Trade idea

As long as FXI trades below $49.85, then new short trade ideas can be initiated between $44.71 and $47.60. Depending on how much room you want this trade idea to move, use a risk price between $48.14 and $49.85.

chart

Your risk price line in the sand is $49.85, if FXI touches that price, even for a second, then you should exit any open trades.

If the trade moves in your favor, then you could consider using the price range between $43.37 and $41.03 as your profit target.

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