We’ve seen these before and I love finding them. The ‘False Move’ is by far and away my favorite trade setup. The reason is really simple: a defined amount of limited risk with an infinite profit potential (theoretically). So let’s get right into it:
We’re looking at the popular iShares FTSE China 25 Index Fund ($FXI). We know that this 33 and change level is very important support that held back in the 4th quarter of last year. This new found support created the higher low that helped take $FXI to 6-month highs earlier this year. More importantly this price also represents the 61.8% Fibonacci retracement from those key October lows that we always talk about in most of the major averages.
Interesting how the price briefly breached those key levels before quickly reversing. This is the sort of action that gets me going in the morning. This is why I do what I do. This is why I study price. To find stuff like this.
So let’s take a closer look. This next chart shows just the last few months. What stands out to me are the lower lows made in price last week while momentum had already turned up. In other words, while price was still trending lower, momentum was putting in a higher low (See RSI Explained):
If this was indeed a false breakdown, I would expect a fast and powerful move higher in $FXI. This would certainly be a positive for US Equities and other risk assets. The risk is defined and the profit potential has no ceiling. But the positive implications on a more macro level cannot be denied. New lows in $FXI and we’ll know there’s a big problem out there and we’ll get much more defensive. But for now, these are extremely bullish developments.