Chinese Stock Market

These days, the consensus that I've been hearing on China's Stock Market is that it is bubbling. I tend to agree, but I also believe that it'll continue rising beyond reasonable expectations.

On the chart above, you'll see that FXI (ETF for China's Market) has had a superb run up from the August lows, nearly doubling in a couple months. However, I think this is Wave3 out of a 5-wave bullish run that began in March, 2007. The recent correction has occured in 3-waves, ending near Subwave4 of Wave3, which also happens to be the 38.2% retracement level for Wave3. The reason I'm confident that today is the end of the correction is that there was a hammer reversal candle accompanied by near-record volume. This means that buyers stepped in strongly on today's swoon, bringing the closing price back near the open.

I am trading this by selling a 180/185 Dec Put spread. As long as FXI closes above 185 by Dec. expiration, I will earn about $2.50/contract. Should it close below, I'll lose $2.50/contract.

EUR/USD Climax?

I think the EUR/USD may have just experienced its climax top. The pair rallied over 170 pips because a top Chinese official alluded to the possibility of diversification out of dollars. The problem is that the rally was purely speculative. Would China realistically diversify out of its dollars when the dollar is at an all-time low? That doesn’t seem likely to me because central banks like to sell on rallies. If anything, China will wait for the dollar to appreciate a little first, so selling the EUR/USD (buying USD) into this irrational rally seems logical.

There are several other reasons why the EUR/USD may have topped. First, the reversal from the 1.4729 top was nearly as strong as the rally up. In fact, the decline occurred in 5-waves, and was followed by a 3-wave correction (see chart). Furthermore, there are hammer reversal candles on the Daily, 8-hour, and 4-hour charts.

Second, the FXCM SSI indicator again shows a decrease in net shorts, even though price raced up 170 pips. Clearly many speculators were stopped out of their shorts, and now longs are piling in to take advantage of the “trend” or dollar weakness, which should “certainly” be exacerbated by China’s selling. Well, since the retail traders are usually wrong, perhaps now that they are rushing in to go long, the market will stop rising.

My strategy is to short the EUR/USD around 1.4645 with a tight stop (just above WaveC). The trend is still strong, so I am not going to risk very much on this trade.

So what can you expect from this blog?

If you are new to this blog, then welcome, we hope you enjoy it.  

My younger brother Narayana and I decided to create this blog because we like to talk about markets and trading oppurtunities we look at all the time.  This blog will allow us to keep track of our thoughts and ideas, as well as get outside opinions in the form of comments from users like you.  Anyways, here are the types of posts you will be able to expect from the two of us:

Aurelien:

More posts on stocks, especially pertaining to fundamentally analyzing companies.  I am especially interested in energy and natural resource stocks and have recently gotten more interested in finding undervalued chinese companies.  I also have a year of experience trading options and have learned many good lessons in that time.

Narayana:

More posts on technical analysis and currency trading, although there will also be some stock posts.  Nar will also have some posts on trading Iron Condors, an option strategy that both of us have experience with but that only he is trading at the moment.

Our goal is that my fundamental analysis combined with his technical analysis will lead to many good entry points on solid undervalued stocks.

One last point:

While both of us put our money where our thoughts are when possible, we are both young and don't have alot of cash, so at least for the time being many of our recommendations may not be actually be traded by us.  We will make sure to disclose whenever we have an actual position in something we talk about.

Thanks!  Look out for my first stock pick tomorrow!

EUR/USD Short Opportunity (Update)

Price action on the EUR/USD is too choppy and overlapping (i.e. the decline has only occurred in 3-wave) to be the start of a bearish trend, in my opinion. However, I do expect another leg down to complete a WXY correction from 1.4503 high. I will close 1/3 of my short position near the triple support level of 1.4375 (Wave4 low, 38.2% retracement of 1.4125->1.4503, and WaveY=WaveW).

I also plan to move my stop to above the WaveW low (1.4403). Why? Suppose the decline from 1.4503 is the beginning of a bearish trend. If we consider 1.4403 to be the Wave1 low, then theoretically a correction of the following Wave3 should not overlap Wave1. If it does, I know the decline is corrective and therefore I get stopped out quickly with a small profit. On the other hand, should I be right about the larger downtrend, and Wave4 does not overlap Wave1, I remain in the trade with a large profit.

Fundamentally, the dollar has a chance to strengthen tomorrow because many indicators point to strong payrolls. Should this be the case, I wouldn’t be surprised if buyers stepped in after a drop on the EUR/USD due to central bank buying.