Chinese stocks are getting ready to rally.
Yes, I know that sentence probably has you scratching your head. After all, I've been bearish on China for several months now.
But the Shanghai Stock Exchange Index (SSEC) is down 26% from its high last summer. And it's down over 20% from when I first wrote "The China Bubble is Ready to Pop
" back in January. Things look a bit different now. If you shorted China with me in January, it's now time to take your profits on the trade.
If we step back and take a fresh look at a chart of the Chinese stock market, we no longer have a bubble looking for a pin. In fact, the chart looks modestly bullish.
Take a look...
In January, the chart broke to the downside of a consolidating-triangle pattern (the red lines). The height of the triangle was about 700 points. So when the breakdown occurred at 3,200 on the index, it projected a move down to 2,500 or so.
As you can see, the SSEC hit 2,500 last week. Then it bounced.
The most recent pattern on the chart is a bullish falling wedge (the blue lines). This type of pattern almost always breaks out to the upside – especially when it's combined with positive divergence on the MACD indicator (a measure of momentum you can see at the bottom of the graph). If it plays out this way, we're looking at a possible rally all the way back up to about 2,900 on the Shanghai Exchange.
That's a gain of 13% from yesterday's close. Maybe that's not enough of a move to get you excited about playing China from the long side. But you certainly shouldn't be short it here either.
Best regards and good trading,