A Little Trouble for Big-Cap China ETF

How February option open interest could impact FXI in the trading days immediately ahead

Feb 12, 2019 at 10:42 AM
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Given the steady stream of daily "will they-or-won't they" headlines with regard to U.S.-China trade deliberations, it may surprise you to learn that the iShares China Large-Cap ETF (NYSEARCA:FXI) has been unusually subdued on the charts lately. As of Friday, the exchange-traded fund's (ETF's) 30-day historical volatility stood at just 18.5%, in the low 17th percentile of its annual range (per Trade-Alert).

But don't mistake "tame" for "lifeless." Instead, it's been a low-volatility rally for FXI in 2019, echoing the action in the broader equities market. The big-cap Beijing tracker started the year by revisiting its late-October lows near $38 -- but then quickly roared higher to revisit familiar resistance in the $43.50 area, which has capped the stock's rally attempts since last June. From its Jan. 3 closing low to its Feb. 5 closing high, FXI gained roughly 14%.

Along the way, FXI managed to take out -- and then successfully re-test -- resistance at its 80-day moving average, which had been a stiff technical ceiling for the shares in late September and early October. This feat took place in mid-January, and was quickly followed by a bull gap above its 160-day trendline.

But while it's certainly been quite lively over the course of its low-volatility "spell," FXI does remain range-bound within the same sideways channel that has confined its progress since last June. Significantly, the upper rail of this channel -- around $43.50 -- coincides with a 20% decline from FXI's Jan. 26, 2018 closing high of $54, with the lower rail defined by those twin bottoms around $38.

Further, from a long-term chart perspective, the ETF's 52-week moving average is hovering right at $43.59. This trendline -- equivalent to a year's worth of trading -- acted as support on a late-2016 pullback, and the ensuing bounce carried FXI all the way up to the aforementioned January 2018 peak (which was roughly a 10-year high). However, the 52-week moving average was breached in June 2018 amid high-volume selling, and could now serve to reinforce resistance in the $43.50 region.

And despite FXI's high-energy breakouts and re-tests of its 80-day and 160-day moving averages, the fund's progress around its 200-day moving average (a key layer of support in April and May) has been quite a bit more tentative. Following five consecutive daily closes above this trendline, currently docked at $42.58, FXI finished Thursday and Friday back below it.

As China's stock markets prepare to re-open after a week's holiday, FXI looks due for a return to volatility in the days ahead -- and given the resistance outlined above, perhaps a move down to the lower end of its trading range. And keeping in mind that it's February options expiration week, FXI's open interest configuration should add an extra layer of intrigue to the proceedings (as should the weekend's trade headlines, of course).

At Friday's closing level of $42.42, FXI could be poised for a "pin" at the popular 42 strike, which is home to open interest of 78,991 puts and 59,345 calls in the front month series. But if traders react negatively to U.S.-China developments, a bout of selling pressure could cause the heavily put-skewed strikes all the way down to 38 to exert a "magnetic pull" on the shares -- potentially resulting in a quicker-than-expected trip down to the low end of FXI's sideways channel.

fxi daily chart 0208

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 10.


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