$HSI - Looking closer at the Hong Kong Trade

Submitted By Gary Tanashian

Just because I am a financial blogger and website owner does not mean I have the answers. I have the answers that work for me and I hope some of the ideas I put out there have helped you as well. But I am just a lowly market participant - just like you - trying to make my way. Why the preamble and why the Hong Kong theme follow up? Because of this mail received from a reader:

Gary:
Your EWH chart scared me, as I'm short the Hang Seng...but then I looked at the actual $HSI chart of the underlying index, and the technical pattern you see on the etf EWH just ain't there on the $HSI.
The EWH is in USDs, and is distorted by currency fluctuations. It's the underlying index chart that tells the real tale, and as far as I can see, it looks fairly bearish, and did not just bounce off any long term support trend line today!

If you draw an equivalent long term trend line on $HSI as you show on EWH, joining weekly lows from '06 and '07. That line got violated in March on $HSI , recovered, and broke below it again this Monday. The $HSI today remains below that equivalent trend line, not above as in the EWH!

I'd rather bet on the index's indicators, not the USD-distorted etf's! --Bob

Now, I went in to the EWH trade without the feeling of "Dood, you got a no brainer here if you stick with it" that I like to have going in. It was more of a "let's take a stab at this POS and see if we can't ride along as a bull for a bit". It is a small position in relation to my overall stance and I am by no means a 'China, India, LatAm (BRIC), commodity mania, everything's gonna sky here!' bull. But nor am I a deflationist as you may know. I think all this stuff is going to take a righteous drubbing before any coming deflation scare ends. But with the US market sentiment in the toilet and touching the highs of last real bull market, and with the $HSI still not breaking major trends, I take a stab and control downside risk. I want to thank Bob for his views because they caused me to think really hard about this before I even finished my first cup of coffee. Edit (10:26) Way to go Bob! I am going to set a stop here that will likely be triggered shortly.