- The rehypothecation scandal and Qingdao probe
- "Industrial and Commercial Bank of China (ICBC) has applied for the right not to settle a letter of credit it issued earlier in the year due to the Qingdao probe" (Zero Hedge)
- Over-leveraged ling of credit deals
- Rising money market rates with increasing liquidity demand
- The 1.5 trillion dollar (maybe, but probably not) Chinese shadow banking system that has been generating money to trusts and companies with deteriorating loans.
- Defaults have occurred but none where investors have had to absorb substantial losses.
For these reasons I have begun to study ETF's following China to identify when such a "Lehman event" might occur and as a (poor) representative of the country's financial health and future direction. Additionally I have included a chart from a triple leveraged China Bear ETF (YANG) to provide you with cover should the situation deteriorate. All of this presupposes that the market is "free" and not centrally controlled by centrally banks, which it is. In short, I am not sure how effective an exercise this will be.
For this exercise I have chosen FXI, the most liquid ETF and the one with the greatest amount in assests. On the weekly chart one will see an ascending triangle which smacks of bullish sentiment. Higher lows began in mid-2011 and about every ten months thereafter. Four hits already exist on the upper band with the next one possibly representing a breakout. This chart, in short, stands in stark contrast to the picture I painted above. My indicators such as the RSI, TRIX and MACD are all showing either overbought conditions or the beginning of movement downwards. My favorite indicator, PPO, has not shown this yet, however. If I were a betting man the feel of the current curve is one that is going to decline regardless of it's overall bullish configuration. However, go long if it breaks $39.00.
|FXI: long term view.|
|FXI: short term view.|
|YANG: short term view|
YANG's twin triple leveraged bull ETF brother YINN is showing imminent weakness and downward movement in the daily indicators. This may continue to squeeze up, but afterwards, then where? Will it form a blow-off top? We are beginning to see a pattern of critical transition zones in several ETF's so far.
|YINN: Short term view.|
|YINN: Long term view.|
|YANG: long term view.|
Jakob Richardson © 2014