The price action is crazy and unpredictable. Is it anymore crazy and unpredictable than normal? Probably not, but being in the speculative phase of the rally — which is the phase of the rally where we have been told that the “all clear” has been sounded — I know that risks are rising. What kind of risk? Risk of loss. Break outs fail. Markets reverse. Volatility increases and stops are triggered.
Take the i-Shares FTSE China 25 (symbol: FXI). A weekly chart is shown in figure 1. Price broke above the key pivot level several weeks ago at 36.78. Resistance becomes support, and by convention (i.e., my rules), a close above 3 key pivot points should be bullish.
Now fast forward several weeks. After the breakout and a 10% gain, FXI has pulled back 10% to re-test the 36.78 level. This past week alone we saw FXI drop over 2% intraday on Tuesday only to open up over 2% on Wednesday morning. The price action is very erratic. More importantly, the significance of a failed break out can’t be understated. It hasn’t happened yet, but a weekly close below 36.78 needs to be respected. We are in the speculative phase of the rally yet risks are rising.
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Several weeks ago, I pointed out the failed break out in copper. See figure 2 a weekly chart of a continuous copper futures contract. The close above the 370 level (breakout) and then reversal (failed breakout) had me saying: “Failed breakouts are never good.” Price not only has fallen over 10%, but it is outside a rising trend channel.
I highlight copper and FXI as two bellwethers of the global economy. Copper has broken down. FXI is threatening. Can the US be far behind?
Lastly, for those looking for a good low risk entry point, this might be it. Of course, you need to understand where we are on the playing field. Certainly, if global central bankers can keep the balls in the air a little bit longer, than an issue like FXI will benefit. Failure of FXI is not a good omen. With prices bouncing around support, it appears we should have our answer soon.
Guy Lerner has beat the S&P500 21 years straight – see his asset model portfolio now!