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Morning Report: China Forming Complex Head and Shoulder Pattern

I am not surprised to see a bounce this morning. ES was up 8 when I woke up and is currently up about 6.  China is what matters and if FXI/PGJ breakdown it is unlikely it will happen without a fight.

fxi_005

FXI is sitting on both horizontal support and just below its 200 DMA. I have drawn circles around the highs that form the complex head and shoulder pattern. The left shoulder has three progressively higher highs before the apex and if pattern symmetry plays out we should see one more lower high on the right side before a breakdown. A bounce before a break makes sense because there likely is not enough downward momentum to break support without a jog higher first.

My downward target if the pattern completes is about $32. So we’re talking about a 15-20% correction. Meanwhile, most of the US indexes are about 10% above their 200 DMA. China is higher beta than the US indexes, so it seems plausible that we could see a 15-20% correction on FXI and a 10% correction on SPY, DIA, QQQQ (approximate).

This is just one scenario. Patterns fail all the time and I certainly would not bet the farm on a China breakdown. I did some selling last week, but I still own most of my secondary/recapitalization portfolio.

spy_007

Traders will have to react depending on how they are positioned. I don’t have a lot of skin in the game right now and I feel comfortable with the stocks I currently own. For the past 3-6 weeks I have been solidly bullish. I’m now in wait and see mode. The major indexes pulled back to their 89/100 DMA on Friday and we’ll have to see how the market reacts here. I certainly don’t want to own stocks if the market corrects 10% back to its 200 DMA. Higher beta stocks are likely to be off 20-30% if the indexes move down 10%. That is significant. At the same time, I don’t want to unload stocks prematurely into a little pullback.

Hopefully we’ll get some clear signals to sort this out. AAPL reports after the bell today. The stock ran down to its 89 DMA on Friday. A good report might cause a huge squeeze driving the stock above its all time high. A bad report will break the stock and send it down at least to $185 and possibly $175 in the short term. Just like the market can’t go higher without China, I also don’t think it can go higher if AAPL is performing poorly.

§2418 · January 25, 2010 · Uncategorized · · [Print]
  • Guest
    I recorded the full Jim Rogers video recorded tonight 1/25 off of Bloomberg. 30 minutes long with Jim giving his opinion on everything.

    http://bit.ly/7aQ5n7
  • Guest
    I am seeing loose areas of support across all of the indexes and sector etfs. I am also seeing the $VIX burning off from an extreme high.

    http://bit.ly/8pqk1F
  • It would have been surprising if the indexes didn't bounce off these obvious support levels. I'm just not sure whether this is just bounce burning off downward momentum before a move lower or just another buying opportunity. The China charts make me pessimistic about this bounce. I think this will take several weeks to play out.
  • I agree very much with this part of Gary Savage's post this morning:

    Now I know someone will come on and proceed to tell me how they did 200% last year alone or 50% last month or some other ridiculous number. I say ridiculous not because I don't believe they did it, but because the only way one does those kind of numbers is by taking huge risk or heavy leverage. And heavy risk always means bankruptcy in the end. So I know that the person who's bragging about trading his way to fabulous gains isn't going to be around long. I'm only interested in looking at traders who are intelligent enough to recognize the real limitations in this business. Idiots taking 20 to 1 risk or even 3 to 1 risk are of no concern to me as they aren't long for this world. They certainly aren't going to survive 10 years.

    The cold hard reality is that the only, let me stress that word only, way for a trader to make lasting money is by strictly controlling risk. That means a trader absolutely must keep position size small if they want to have any chance at all of having more money 10 years from now than they do today. That simple fact alone makes it very very hard to even average 20% annually much less 30%.

    http://garyscommonsense.blogspot.com/2010/01/cold-hard-reality.html
  • Trimmed $PVTB and $HBAN back to their original position sizes.
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