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Thursday, March 25, 2010
Everything is lining up for an explosive move in Chinese stocks. Take a look at this chart of the Shanghai Stock Exchange (SSEC)...
SSEC peaked on August 2, 2009, and then plunged more than 20% over the next four weeks. Since then, Chinese stocks have mostly waffled back and forth, forming a series of higher lows and lower highs. This action creates a "consolidating triangle" formation on the chart, where the support line is rising while the resistance is falling. Eventually, the two lines come together and the stock is forced to break out or break down from the pattern.
My guess is the odds favor a breakdown.
Look at the two moving average (MA) lines in the middle of the chart. The 50-day MA just crossed below the 200-day MA. In technical terms, this is a "bearish cross." It often kicks off the start of a new downtrend. And this next move is likely to be huge.
The bottom graph shows the width of the Bollinger Bands – which is a measure of volatility. Periods of low volatility are always followed by periods of high volatility, and vice versa. The Bollinger Bands are narrower now than they have been all year, as the volatility has been quite low.
It looks to me as if the Chinese stock market is headed toward a perfect storm...
There's the consolidating triangle pattern, the break of which will lead to a several-hundred-point move in the Shanghai Index. The moving averages have committed a bearish cross. And the Bollinger Bands are squeezing together.
There's a big move coming, and it'll most likely be to the downside.
I recommended a bearish China trade to my Advanced Income subscribers a few weeks ago. It's already up 15%, but I expect it'll return 50% over the next couple of months. It'll profit as China falls, but best of all, it can make money even if I'm wrong about China and the Shanghai Index moves higher.
This trade follows on the heels of two other bearish China recommendations that returned 61% and 47%, even while the Shanghai Index consolidated over the past few months. It's not too late to get in on the current trade. It's one of my favorite trading ideas this year.
If you're interested, click here.
Best regards and good trading,
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