China Large Cap Stocks (FXI) Vulnerable For Further Downside

China recently lowered its annual growth rate target for the decade down to 7%.  How, if at all should this reflect Chinese stock prices?  I took a look at the charts of the iShares China 25 Fund (FXI), representing the large cap space, for a view from the technical front.

Just like U.S. and European stocks, got hit hard during the financial crisis sell-off in 2008, so too did Chinese stocks.  The iShares China 25 Fund (FXI) dropped a cool 70% plus in the twelve month period from late 2007 to late 2008.  From there the FXI staged a sharp rally as global stocks rebounded, which ultimately round resistance in November 2010, just as it retraced roughly half of the 2007 – 2008 sell-off.  Since the November 2010 top the FXI again fell lower and eventually, after retracing 61.80% of the 2009 – 2010 rally, found a higher low  in October 2011.  Since then the stock has traded in a more narrow and choppy range, which on the multi-year chart below completed a long-term wedge pattern with a narrowing range.

Ultimately these long term wedge patterns resolve by breaking out in either direction.

FXI trading wedge

On the daily chart of the iShares China 25 Fund (FXI) we note that this exchange traded fund is still lower by roughly 10 year to date, thus not having participated in the global stock rally thus far in 2013.  The FXI built a solid top in January, from which it cascaded lower by around 17% into a mid-April bottom.  From there a rebound occurred, which however lost steam right as the FXI retraced 61.80% of the early February – mid April correction.  From here, odds now favor the FXI trades 5% lower to at least match its mid-April lows, which would then also re-test the lower line of the multi-year wedge formation on the chart above.

Beyond that, from where I sit its too early to tell whether the FXI will eventually break below the wedge pattern or rebound back to the upper end of it.  What I do know is that an eventual breakout/breakdown in either direction will likely gain momentum and allow traders to hop on a bandwagon trade.

FXI daily





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