The Trendline to Watch for Beijing's Big-Caps This Week

As China stocks struggle under the weight of a trade war, one trendline could offer key clues

by Bernie Schaeffer

Published on Jun 19, 2018 at 7:34 AM
Updated on Jun 19, 2018 at 7:34 AM

Along with the U.S.-North Korea summit and the Fed's latest policy announcement, one of the top stories in the market last week was China -- namely, the Friday imposition of 25% tariffs on certain Chinese goods by the Trump administration, which Beijing promised to match in a retaliatory move. While the impact of escalating trade tensions was felt globally, China-based equities and exchange-traded funds (ETFs) naturally captured a good deal of traders' attention.

Among those affected was the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which is designed to track the fluctuations of several hundred of the largest and most liquid stocks in China's A-shares market. ASHR gapped lower at the sound of Friday's opening bell -- and despite opening narrowly above its 320-day moving average, the ETF lost its footing here almost immediately. By the close, ASHR was docked at $29.06, with its 320-day trendline just out of reach at $29.15.

Prior to Friday's breach of this level, ASHR had tested support at its 320-day moving average as recently as May 30 before bouncing back to close the session well off its lows. To find the last time ASHR actually closed beneath its 320-day, though, we have to look back just over a year -- and this prior example might give China bulls hope for the current situation.

Back in mid-May 2017, ASHR gapped below its 320-day, and then notched multiple closes below this trendline. But after spending about four days forming a base around the $24 level, the ETF powered sharply higher -- almost uninterrupted -- all the way up to its late-January 2018 highs just shy of $35. So, in that most recent instance, the 320-day breach seems to have been indicative of exhaustive selling.

Likewise, the China-driven sell-off that rocked global markets in August 2015 prompted another ASHR bear gap below its 320-day (on Aug. 24) -- but the fund bottomed out just two days later (at $28.84), and went on to recoup about a third of its losses in less than three months.

But there's one "wild card" 320-day breach, which took place in late-November 2015. That time, ASHR's bear gap below this trendline didn't result in a near-immediate snapback rally. Instead, ASHR's attempt to reclaim its perch above the 320-day was thwarted, with this trendline emerging as resistance in early December of that year. By the time ASHR slumped to its closing low of $21.08 on Feb. 11, 2016, the shares were down 44% from their Nov. 25, 2015 pre-bear gap close.

Notably, the action during the second half of 2015 provided some valuable clues for detail-oriented investors. Following that year's August bear gap, ASHR's "comeback rally" included a few intraday peaks around the site of its 320-day, and the fund chopped around above and below this trendline on a daily closing basis for about five weeks before the November bear gap served as the "nail in the coffin" for the late-2015/early 2016 free-fall. Conversely, the May 2017 break beneath the 320-day was resolved with a single daily close back above this moving average, with no "choppiness" to speak of.

So, in the immediate days ahead, ASHR's ability (or inability) to rapidly reclaim its 320-day moving average could very well act as a major "tell" as to whether the ETF has just hit bottom -- or whether the bottom has just fallen out.

ashr daily june 2018


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 17.

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