The collision of global markets and social mood

Wednesday, December 5, 2012

A Present From Shanghai

I got a little present last night from China.

The Shanghai Composite Index (SHCOMP) surged 2.9 percent to 2,031.91 at the close, capping the biggest advance since Sept. 7. Trading volumes were 102 percent above the 30-day average, according to data compiled by Bloomberg. The CSI 300 Index rose 3.6 percent to 2,207.88, with the materials, industrial and financial gauges climbing at least 3.6 percent.

Chinese stock investors emptied trading accounts at the fastest pace in 16 months last week, three days before the benchmark Shanghai Composite Index (SHCOMP) rallied the most in three months.

That's just what I wanted to see, all of it: price action, volume, and retail flipping out and puking. Now I have a hard stop at the 1,959.77 low from Dec. 3. I will use this as my stop rather than FXI because it's the index that matters to me, not an imperfect ETF designed to mimic the index.

Right on cue, there are the pundits, prognosticators, know-it-alls, and passive-aggressive types who have jumped on the anti-Shanghai Composite bandwagon. If China bottomed, so what. If it didn't, so what. Put a stop in and get on with life.

So it's humorous to see the following story this morning.

Why Would Anyone Want to Invest in China?  asks Greg Harmon, Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity at Dragonfly Capital. I've always thought this guy was a pretty good dude. He's also a CMT and CFA. The first chart he shows?


Who knows, maybe he hates Tom DeMark (who just made a big call on China) the way a lot of people hate Bob Prechter. He makes a great argument too. But I'm not here for an argument. I'm here to make money trading by my own rules, and the rules of the methods I follow. There is no single way to trade. The Shanghai Composite just keeps going lower. Are they not watching? just isn't one of the ones I use.

The point is, who knows where it's going to go? Why slam people for taking a shot. That's what this business is all about: waiting for your set ups and then taking a shot.

I'll also take a shot at what I think the S&P is going to do, just like I do everyday before I trade, because this is not a "forecast-free investment blog."

This is why I think higher prices may be on the way. Notice this is an apples to apples comparison of ETFs. I'm not using them to tell me what price level the S&P cash is going to go to. I just use these to tell me whether it's going higher or lower, in this case, higher seems to be in the cards.

Usually (but not always) when JNK and HYG lead (junk bonds and high yield credit) the SPY follows. Since they have both broken out to the upside, and since futures are higher this morning (they've faded though), and since China may have whetted the Risk On appetite, I could see at least the 1415-1417 area get tested.

Ideally, lower numbers get tested, however. I would like to see 1400 hold, but a successful test of it would be a good thing. If not, a 38% Fib level is at 1393, and 1385.43 waits.

Take the best shot you can, everyday, win or lose.

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