INTERNATIONAL EQUITIES WEAK AND CHINESE EQUITIES STRONG – IS THAT SET TO CHANGE?

After rallying hard since March, Chinese equities, represented by the iShares China Large Cap ETF (FXI), could either be on the verge of another 15% of upside or a massive drop. Chinese equities, according to the chart of FXI have been far outperforming the MSCI EAFE international equity index (represented by EFA) for quite a while now. Is FXI leading the way higher? Or, is EFA leading and is the FXI setting up to copy EFA's recent bearish behavior? EFA looking very weak relative to the US and the emerging markets Despite the upside seen in the last seven trading sessions or so, the iShares MSCI EAFE ETF (EFA) has been a clear underperformer this year – only being matched in its misery by the US Micro Caps. The EFA has broken down below its 200-day moving average and appears to have even more downside potential – even if this is merely a correction in a long-term bull market. The Fibonacci price projection in that (“abc” downside correction) scenario is $64.45 (from $66.13 as of Friday's close). The bullish cabal would say that the “correction support” was actually $64.87 and not the $64.45 level and that it was successfully tested during the last sell-off. We'll have to see how that turns out, but the relative underperformance of EFA versus the emerging markets and the US is still something to which analysts must pay attention. Chinese stocks facing a critical fork in the road for the short-term The FXI has been on fire of late, but faces a very important potential technical turning point at $41.88 (from $41.07 as of Friday's close). The bears would contend that $41.88 is the Fibonacci projection for the “c” wave of a short-term “abc” upside correction that should lead to a sharp turn lower. The downside projections for the bears come in at just below $34 in the intermediate-term to all the way down to the lower $20s in the longer-term. However, any break and close above that $41.88 level would send the bears running for cover and would likely lead to a continued run in FXI up to the $47.99 level. Interestingly, even in this short-term more bullish scenario, the longer-term picture could technically still be quite bearish – as long as the $47.99 level held up as resistance. So, is China leading the way for EFA to progress higher or are the issues facing Europe going to seep into the Chinese economic and markets outlook? “Only time will tell” is the cop-out answer. But, technicians will be watching the action at $41.88 level on the FXI as a major “tell” for both FXI as well as the global equity markets. Disclosure: No positions at the time this article was written