I’m buying Chinese stocks right now for a short-term trade.

Yes, I know the Shanghai Composite Index (SSEC) has fallen more than 20% from its January peak.

And, that sort of decline usually means the SSEC has entered a bear market. It is headed lower over the next several months.

But over the next several days, China bulls can make a lot of money. Look at this chart of the Shanghai Composite Index (SSEC)…

The SSEC rarely strays more than 5% above or below its 50-day moving average line. On Friday, the SSEC closed about 9% below its 50-day MA.

That’s an extremely oversold condition – which confirms the extremely oversold condition on all of the other technical indicators.

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This is an ideal setup for a “reversion to the mean” trade.

Yes… maybe China has entered a bear market. And yes, maybe the SSEC is headed lower over time.

But, stocks don’t move straight down, or straight up. They fluctuate between oversold and overbought conditions. So, even within a long-term downtrend, Chinese stocks can rally.

I suspect we’re nearing the start of at least a short-term rally in Chinese stocks.

Sentiment towards the sector is horribly bearish right now – as opposed to just five weeks ago when everyone loved China. Valuations are relatively cheap. And, the technical condition is remarkably oversold.

For the short term, I suspect the downside in China is quite limited. And, if the SSEC starts to bounce, then it could retest its 50-day moving average as resistance. That would be about a 10% rally over the next few weeks.

Aggressive traders ought to be buying China right here in anticipation of at least an oversold bounce.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In the mailbag, a question on how to protect your portfolio for the next recession…

I agree on the longer-term outlook of the S&P, using the 20-month exponential moving average. I do think we still have some bullishness in the market. Anyone of several economical events could cause the bulls to run in front of the bears, you mentioned several. A recession is extremely likely.

On the other side of the coin is "what to do about it" when the recession starts. Mostly, I hear buy precious metals. But do the data tell us about any other investment that will help us salvage our portfolios and even prosper? I’m not seeking the name of stocks, but more of an investment approach. I don’t like the idea of sitting on a pile of cash and gold and would rather be engaged in the markets with a better strategy. Comments?

– Frank L.

Do you have a question or comment? Jeff can’t respond to every reader letter, but he does read every one that comes in. Send him your thoughts right here.

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