Inverse China ETFs at Support Amid Slowdown Fears

Fears over a slowing Chinese economy reemerged Monday when data released by the world's second largest economy showed that gross domestic product (GDP) grew 6.6% in 2018 – its slowest pace in 28 years.

Analysts blame China's economic slowdown on a reduction in both domestic and global demand. Initiatives to reduce significant amounts of debt and tighten lending standards may help explain weaker retail sales, industrial production and property sales in the final quarter of last year. To compound problems, external demand for China's exports fell 4% last month from the previous December as the consequences from a slowing global economy and a nearly year-long trade war with the United States began to bite.

"Although the resumption of trade negotiations between China and the U.S. may reduce the risk of further escalation of trade friction, China's domestic and external demand are under downward pressure," said Liu Liu, an economist at China International Capital Corporation Limited (3908.HK), per Bloomberg. To avoid a further slowdown, China has signaled that it will implement stimulus measures such as tax cuts, infrastructure spending and a reduction in the level of reserves banks need to hold.

Traders should monitor these three inverse China exchange-traded funds (ETFs) that rise when Chinese stocks fall. Each fund sits at crucial technical support.

Direxion Daily FTSE China Bear 3X ETF (YANG)

Launched in 2009, the Direxion Daily FTSE China Bear 3X ETF (YANG) seeks to return three times the inverse daily performance of the FTSE China 50 Index by investing in swaps, futures and/or short positions. The underlying index consists of the 50 largest Chinese stocks traded on the Hong Kong Stock Exchange. Short-term tactical traders benefit from the ETF's tight average spread of 0.16% and ample daily liquidity. YANG, with $71.81 million in assets under management (AUM) and offering a 0.56% dividend yield, is down 16.48% year to date (YTD) as of Jan. 23, 2019. The fund charges a 1.02% management fee.

YANG shares have spent the past seven months trading within a loosely constructed trading range. The price now sits toward the lower end of the sideways period as well as on an uptrend line extending back to January 2018 that provides a high-probability trading area. Look for an entry point at $55 with an initial upside target of $70. If the price pushes through resistance at $70, expect a test of the October swing high. Protect trading capital by setting a stop-loss order just below the uptrend line.

Chart depicting the share price of the Direxion Daily FTSE China Bear 3X ETF (YANG)

Direxion Daily CSI 300 China A Share Bear 1X ETF (CHAD)

With net assets of $65.68 million, the Direxion Daily CSI 300 China A Share Bear 1X ETF (CHAD) aims to provide inverse daily exposure to the CSI 300 Index. The tracked index comprises China A-shares that trade on the Shanghai and Shenzhen exchanges. Even though the fund trades over 14,000 shares per day, traders should be mindful of liquidity as it deals outside Chinese market hours. The ETF's expense ratio of 0.85% is less than the 0.94% category average. As of Jan. 23, 2019, CHAD pays a 0.70% dividend yield and has a YTD return of -7.27%.

The CHAD share price trended steadily higher between February and October last year before entering into a range-bound period throughout November and December. The current pullback to a multi-month trendline provides a suitable entry point for swing traders. Consider opening a long position near the $37 support level and placing a stop below $36. Take profits off the table if price moves back toward the 52-week high at $41.04.

Chart depicting the share price of the Direxion Daily CSI 300 China A Share Bear 1X ETF (CHAD)

ProShares UltraShort FTSE China 50 ETF (FXP)

Created in 2007, the ProShares UltraShort FTSE China 50 ETF (FXP) attempts to return two times the inverse daily performance of the FTSE China 50 Index. The fund charges a 0.95% management fee and suits traders who want to bet against sectors dominated by state-owned enterprises, such as financials, energy and telecommunications, as the benchmark index provides overweight exposure in these areas. FXP has an average daily dollar volume of over $5 million and a reasonably tight 0.11% average spread. Trading at $70.91, with AUM of $38.54 million and yielding 0.16%, the ETF is down 11.45% for the year as of Jan. 23, 2019.

Despite numerous range-bound periods in 2018, FXP shares closed last year up more than 12%. More recently, the price has retraced throughout early 2019 to offer an attractive trading opportunity. Traders should think about placing a buy limit order between $67.50 and $70.00, where the fund's price finds support from a long-term trendline and the 200-day SMA. A take-profit order could sit near $80, where the price may hit resistance from a horizontal line that connects several swing highs. Cut losses if the fund trades beneath the early December swing low.

Chart depicting the share price of the ProShares UltraShort FTSE China 50 ETF (FXP)
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