China Goes for a Breakout

Chinese stocks came to life after their New Year's holiday with the Shanghai Composite ($SSEC) and some ETFs breaking double bottom resistance. Before looking at these charts, let's review the double bottom, which is a bullish reversal pattern. First and foremost, there must be a downtrend to actually reverse. Second, there are two lows in the same area. Third, the pattern is confirmed with a break above the intermittent high.

The first chart shows the Shanghai Composite falling over 30% from January to October 2018. Notice that this trend reversal started with a break below support and the 40-week SMA in January. Thus, there was a clear downtrend in place. The index then found support in the 2450 area in October and December to start the double bottom process. Provided it holds, this week's break above the intermittent high confirms the double bottom and points to a trend reversal. A break above the 40-week SMA is the next hurdle.

The indicator window shows 14-week RSI with a bullish failure swing. Do not confuse this with a bullish divergence because the bullish failure swing is independent of price. Put forth by Welles Wilder, creator of RSI, the bullish failure swing sets up with three stages. First, RSI moves below 30 and bounces. Second, RSI pulls back and holds above 30. Third, and most important, RSI breaks above its prior high. All three stages are present and this is a bullish momentum signal.

The next chart shows the China iShares (FXI) with the Shanghai Composite in the indicator window and the Yuan Fund (CYB). There are two drivers to the ETF: the value of the underlying stocks and the value of the currency. A rising Yuan is net positive for the USDollar-priced ETF, while a falling Yuan is net negative. Note that FXI broke above its November high and exceeded its 40-week SMA. Similarly, the Yuan Fund is above its 40-week SMA.