04 November 2008

Taking Another Good Hard Look at FXP for a Short-Term Trade

Stars - Elevator Love Letter

I remember picking up Stars' second record back in '03 at the FNAC in Barcelona after hearing this song presumably on CBC Radio 3. Enjoy.

And now let's shift from Montreal pop to Hong Kong stocks...

I previously examined the ultra-short FTSE/Xinhua 25 ETF (FXP) on WershovenistPig. Please read that post if you want to see that there are no new ideas, only old ideas regurgitated and hopefully reinvigorated with new data.

FXP is a tricky ETF in that it gives an American retail investor an easy and liquid way to short China.

What red-blooded, Commie-baiting American doesn't want to short China? Likewise, in the future according to Joss Whedon, what Browncoat wouldn't want to do what he could to undermine the Sino-American alliance?

However, FXP doesn't track the Hang Seng, or the CSI 300. FXP attempts to double the inverse returns of FXI, whose holdings are some of the largest companies that trade in Hong Kong. If you click on the next chart, you will see how the Hang Seng correlates with the FXI ETF. Note how the ratio remained between 480 and 530 through late-August, and since then, FXI has had significant difficulty tracking the Hang Seng index.

What the above-chart shows, and what I have experienced with previously owning FXP, is it's difficult to get a good grasp on where FXP will trade based on watching the Hang Seng.

A superior way to evaluate FXP is to forego fundamental analysis and go strictly technical. Over the past year simply using the RSI(2) indicator, and buying shares when the indicator is oversold (generally at or below 15), is a profitable endeavor with a high rate of success:

My over-annotated chart shows that the RSI(2) of FXP closed below 15 today.

A quick glance at the chart shows that FXP has dropped almost 100 points in the last six trading sessions. To say this is a volatile ETF is to say something glaringly obvious. FXP has dropped to the $80's, a level of support from which it has subsequently soared three times over the last two months.

I will be shopping for shares later today, perhaps buying from some poor schmuck who recently picked up shares at $180.

No comments: