Friday, October 5, 2012

FXI: Trend or head-fake?

iShares' FTSE China 25 Index Fund (FXI), the leading exchange-traded fund for China, broke above its 20-day high today, triggering a Turtle Trading bull signal for the first time since late July.

China, of course, is THE economic story of our time: Poor communist country, beaten down by colonial powers for a century, discovers capitalism, moves to double-digit growth, builds big buildings and fast trains, finances a significant portion of the U.S. government's debt and ends up being the 21st century's greatest promise for or threat to the happiness of humankind (depending upon your degree of nationalist paranoia).

But we technical traders, of course, are never seduced by good stories. Some say, "Show me the money". I say, "Show me the chart."

And FXI's chart has been moving sideways since May. The range for the past quarter has run from $31.62 to $35.67 and has been a good field for swing trades, but not for trends.

The most recent leg up began Sept. 5 from $32.12 and broke past the 20-day high of $35.67. The one-day force index, a filter a use to weed out trades that I lack confidence in, is up slightly today and so allows the trade.

Analysis of trade frequency and price on a half-hour chart shows that FXI is in the process of  establishing a higher most-traded level of $35.61, up significantly from Thursday's $35.16. This is a strong near-term bullish indication.

The fair-price zone ranges from $34.85 to $35.53, encompassing 68.2% of of transactions surrounding the most-traded level ($35.16). That will jump to a higher level once the $35.61 level exceeds the prior most-traded price.

Longer term, FXI reached a post-recession high of $47.99 in early Novmber 2010 and has been in a downtrend since. The present sideways segment can be interpreted as part of a symmetrical triangle, with a base running from $28.61 to $40.74. This is a continuation pattern, so if that interpretation plays out, it suggests further decline.

The closest upside resistance level is $38.58, set last May.

Morningstar gives FXI just two stars; nothing to cheer about. And no wonder. It has an 80% correlation with the S&P 500 -- why bother with foreign when you can trade domestic blue chips, yes?

But there is a lot of trading going on. FXI on average trades 10.9 million shares a day and has an awesome selection of option strike prices, with open interest mainly in the five figures near the money, and even one in the six figures. The front-month at-the-money bid/ask spread for calls is under 2%.

Implied volatility is at 22%, in the lower half of the six-month range. It has been declining on a very gentle slope since mid-September.

Options are pricing in confidence that 68.2% of trades will fall between $33.26 and $37.88 over the next month, for a potential gain or loss of 6%.

Today's option trading is just 5% below the five-day average volume. Calls lead at 27% above average volume, while puts trail at 49% below average.

The fund goes ex-dividend in December for a semi-annual payout most recently yielding 2.61% annualized.

Decision for my account: This is a position I can take under Turtle rules. I'm less confident when I look at support and resistance. This level has been tested before, and I would want to see a more significant breakout before entering.

The Turtle rules say it's the start of a trend. My eyes on the chart say it's a potential head-fake.

However, my funds are fully committed at this point under my trading rules, so I'm unable to take the trade.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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