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Why Chinese Stocks Are About to Sink

By Jeff Clark
Thursday, June 2, 2011

China bulls look out. There's trouble brewing in Shanghai.
We can argue about the fundamentals of the Chinese stock market. The bulls say rapid growth, cheap labor, and record trade surpluses will push Chinese stock prices higher. The bears argue widespread fraud, a slowing global economy, and political pressures are bad for the Chinese market.
There are plenty of experts on each side of the fundamental argument. There are lots of reasons to be bullish and lots of reasons to be bearish. We might as well just flip a coin.
The technical condition, however, is a little clearer: It's bearish.
For the past two and a half years, the Shanghai Stock Exchange has carved out a nice consolidating triangle pattern on its weekly chart. It's a long-term series of lower highs and higher lows. And last week, it finally broke out of this pattern to the downside.
Take a look...

We use weekly charts to analyze long-term trends. Last week's breakdown is bad news for long-term China bulls.
Given the size and duration of the consolidating triangle pattern, it's likely we'll see the Shanghai Stock Exchange trade down around 2,200 sometime later this year. In the short term, 2,400 looks like a good target over the next few weeks.
It should happen soon.
When a stock breaks down from a consolidating triangle pattern, the move tends to be dramatic and quick. Any brief bounce should be used as an opportunity to establish short positions.
On Tuesday, China got a brief bounce. It doesn't show too well on the weekly chart, as one day's activity hardly registers. However, the Shanghai Stock Exchange Composite Index rallied almost 2% Tuesday – thereby giving traders a lower-risk shot at shorting China.
If you're bearish on China, use any short-term rallies to establish short positions.
If you're a China bull, you may just want to stand aside for a few months. Things could get ugly over there.
Best regards and good trading,
Jeff Clark

Further Reading:

While Chinese stocks may experience some turbulence over the next few months, Jeff recently shared some safer investment ideas with Growth Stock Wire readers:
Shares of this company are "down 33% in the past six months," Jeff writes. "Analysts have been downgrading the shares. And CNBC's Jim Cramer recently hit the 'Sell, Sell, Sell' button when asked about the stock." But this dominating blue-chip company has never been cheaper.
"Here's a big stock... in the most volatile sector... trading at a 30% discount to the valuation of the overall market... and paying a dividend greater than the yield on a three-year Treasury note," Jeff writes. Read more here: The Best Time in Two Years to Buy Gold Stocks.

In The Daily Crux
Market Notes
Gold prices jump to four-week high as recent U.S. dollar rally takes a break.
The other "safe haven" the Swiss franc – soars to new record highs vs. both the euro and U.S. dollar.
Video game companies hit uptrend... Electronic Arts and Take-Two are up about 50% in six months.
Hot "social networking" stock LinkedIn plummets 20% in just four days.
Market Watch
Symbol Price
S&P 500 1345.20 +0.0% +25.6%
Oil (USO) 39.52 -2.4% +19.1%
Gold (GLD) 149.91 +0.2% +25.0%
Silver (SLV) 35.75 -4.9% +98.4%
U.S. Dollar 74.60 -0.4% -14.1%
Euro 1.43 -0.5% +17.3%
Volatility (^VIX) 18.30 +18.5% -42.9%
Gold Stocks (^HUI) 542.15 -1.9% +19.6%
10-Year Yield 2.97 -2.6% -10.0%

World ETFs
Symbol Price
S. Korea (EWY) 64.94 -1.6% +49.8%
Taiwan (EWT) 15.74 -0.1% +43.7%
S. Africa (EZA) 71.46 -2.0% +33.9%
Singapore (EWS) 13.92 -2.0% +32.5%
Israel (ISL) 17.08 -1.2% +26.8%
USA (SPY) 131.87 -2.3% +25.1%
Canada (EWC) 31.97 -2.8% +24.9%
Russia (TRF) 21.44 -1.9% +24.8%
Lat.America (ILF) 51.29 -2.1% +23.4%
China (FXI) 44.48 -2.0% +17.4%
India (IFN) 29.55 -0.8% +15.7%
Japan (EWJ) 10.14 -1.3% +7.7%

Sector ETFs
Symbol Price
Oil Service (OIH) 149.74 -2.4% +69.4%
Basic Mat (IYM) 78.43 -3.0% +41.7%
Internet (HHH) 74.21 -2.4% +39.5%
Semis (PSI) 17.58 -1.8% +37.2%
Telecom (IYZ) 25.30 -1.4% +36.5%
Industrials (IYJ) 69.01 -3.0% +29.7%
Real Estate (IYR) 61.03 -2.8% +29.3%
Biotech (PBE) 22.71 -2.4% +29.3%
Health Care (IYH) 74.16 -1.3% +27.9%
Big Tech (QQQQ) 57.09 -2.2% +27.3%
Big Pharma (PPH) 71.29 -1.3% +26.7%
Transportation (IYT) 95.89 -3.3% +26.3%
Media (PBS) 15.08 -2.7% +24.7%
Consumer Svcs (IYC) 72.22 -2.0% +24.5%
Utilities (XLU) 33.52 -1.0% +24.5%
Retail (PMR) 21.11 -2.4% +23.0%
Water (PHO) 19.28 -3.1% +22.9%
Software (PSJ) 26.22 -2.2% +22.6%
Insurance (PIC) 16.79 -0.5% +19.1%
Defense (PPA) 19.73 -2.5% +16.8%
Construction (PKB) 13.21 -3.5% +14.8%
Financials (IYF) 56.21 -3.2% +9.9%
Alt. Energy (PBW) 9.24 -3.3% +8.3%
Nanotech (PXN) 9.05 -1.7% -0.2%

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