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This Is a Stupid Trade

By Jeff Clark
Thursday, May 6, 2010

The China bears are out in force.
 
The Shanghai Composite Index (SSEC) – essentially the "Dow Industrials of China" – has fallen more than 10% over the past three weeks. China's GDP is slowing down. Inflation is picking up. Real estate prices are looking toppy. And debt levels are increasing.
 
Now, all of a sudden, everyone is bearish and looking to short China.
 
For short-term traders, though, shorting China right now is a mistake. The right time to short China was back in late March (I wrote about it here). The Shanghai Composite Index was tracing out a consolidating-triangle pattern, and the odds favored a breakdown.
 
That's exactly what happened. Take a look...
 
 
Based on this pattern, the index could fall to about 2,700. So there's still some short-term downside potential. But now is not the time to establish new short positions. The easy money has already been made, and this trade is just about over.
 
In late March, traders were looking at a potential downside move of about 15%. That justifies a speculative trade. Today, however, we're looking at making maybe 3% if this pattern hits its target.
 
Why bother?
 
Shorting China here just doesn't make sense. In fact, it's downright stupid.
 
Traders who shorted a few weeks ago and are sitting on good gains can maintain the position a while longer. But they need to start thinking about covering those positions as the index gets nearer to the downside target.
 
The next short China opportunity will come after the Shanghai Composite bounces a bit and relieves its current oversold condition. Ideally, the index could bounce all the way back up to its previous support line, around 3,050.
 
For today, though, China bears need to look elsewhere for a good risk/reward trade.
 
South Korea might be a good choice. I'll tell you more about that trade next Tuesday.
 
Best regards and good trading,
 
Jeff Clark




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