September 21, 2009

Xinhua China 25 vs Dow Transportations

For months, perhaps bordering on years, the investing community has been abuzz with the growth of the Chinese markets. Aside from the advance, is this once emerging market giving us clues as to the future of markets worldwide?

The top chart above plots a 1 x 3 point and figure chart of the iShares FTSE/Xinhua China 25 Index. Red dashed horizontal lines denote resistance levels from previous consolidation areas. The most significant recent up and down trend lines are also plotted. The bottom chart is a percent change chart, contrasting the Chinese ETF (in red) and the Dow Transportations (in black). A black dashed vertical line marks the Oct 07 swing high in China, and red crosshairs plot the Mar 09 pivot low in the Transportations. Black dashed horizontal lines denote resistance levels for the Transporations from previous consolidation areas.

What's apparent in the top chart is that the Chinese market is in a strong uptrend, well above its uptrend line. It has, however, hit a point of resistance regarding its former congestion area. In the bottom chart, the Xinhua and Dow Transportation indices have traded in near unison since Mar 09, with the Chinese market advancing 83%, and the Transportations 85%.

Visually, these markets appear highly correlated since the Mar 09 bottom - this is, however, far from the norm. While the Dow Transportations rolled over before the broader market in the summer of 2007, the Chinese market continued to fly. Again, while the Dow Transportations made lower lows along with the broader market in early 2009, the Chinese market had already bottomed in the previous October.

While the two markets appear to be in sync, technicians should take cues for the Dow Transportations, and in turn the broader market, from the Xinhua 25 index. With the Chinese ETF clearly at a point of resistance near $44.50 in the point and figure chart, the current long side target for the Dow Transportations of $4,111.68 (92.65% advance from the Mar 09 low of $2,134.21) should be respected. Should the Chinese market break out again to the upside, its target near $53.50 would translate to a long side Dow Transportations target of $4,626.98 (116.80% advance from the Mar 09 low of $2,134.21).

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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