China China China

You guys see this thing? Talk about nice risk/rewards.

$FXI is the iShares FTSE China 25 Index Fund. I think this would be a logical place to enter a trade with limited risk and a nice reward opportunity. But before we even get into the chart, understand that the relative strength out of this space has been tremendous. After underperforming the United States for a solid three years, China has been on fire since early September relative to the S&P500. This is really the reason we’ve been watching so closely.

Now to the chart. This thing is beautiful. Look at the support from March and April that broke down and turned into 5 months worth of resistance. As always, the more times that a level is tested, the higher the likelihood that it breaks. And in this case, it took 4-5 tests of the mid-35s to get back above. So now polarity should theoretically come into play turning that killer resistance into new found support.

But wait! There’s more! Look at the rising 50-day moving average (in blue) coming up and catching that price action as it also tests the 200-day (red):

Momentum also favors the bull case here for China. The October breakout in $FXI took the relative strength index into overbought conditions. We love that as it shows us evidence of an extreme amount of buying. Also, support here in the low 40s for RSI is definitely a bullish characteristic.

We’ve been talking about the potential for Emerging Markets to start outperforming (see Reuters and MarketWatch). So if we’re going to be right on that call, then we should start to see a rally here for China. As far as upside? We could see mid to high 40s in $FXI when all is said and done.

And I think the best part about this position is the simple risk management aspect that it brings. Remember that it’s not all about being right and trying to figure out how high something is going. For us, the most important thing to ask is, How much are we willing to risk on this one? When we’re wrong, we don’t want it to matter. And on this, we wouldn’t want to be long below 35.40, which is only about 1% from current prices. So to risk 1-2% for a 35-40% potential is the perfect trade for us. And I’ll say it again – for us. Everyone is different. We like to assume that we’re wrong before entering positions. Most people I speak with assume they’ll be right. That doesn’t seem like the right mentality to have.

This is how we trade…