It seems like everything we read nowadays has something to do with the coming crash in China. The bears make a pretty good case; a big bubble in real estate, loads of excess manufacturing capacity and total indebtedness well beyond that which existed in the US prior to the now infamous 2008 housing crash. In many cases, the similarities are frightening.

But here’s where things are different; the 2008 housing crash was not written about extensively until after it happened. With China, it seems that every Tom, Dick and Harry with a basic knowledge of economics and word processor knows that the next big disruption to the global economy will come from the Middle Kingdom and is busily writing about it. “Black swans” are metaphors for unexpected events. Not only is a slowdown in China widely expected; it is already built into the market.

The Xinhua China 25 ETF is down 20% since early December and the Chinese stock market as a whole has been one of the worst performers of the past year. The next big “Lehman” event everyone is searching for will probably not come from China because that is where everyone is looking. In fact, holders of beaten down Chinese equities have already experienced their “Lehman” moment. Consequently, we believe the next big Chinese surprise could be to the upside.

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Bullish Setup in the Australian Dollar

China is the destination of the lion’s share of Australia’s commodity exports so the value of the Aussie dollar tends to rise and fall with the fortunes of its northern neighbor. The “Aussie” tracks China fairly well so traders like to use it as a proxy for China. We are going to do the same thing. The Australian dollar dropped substantially during the past year tracking the Chinese economy but, as the chart above suggests, appears to be in the process of bottoming now.

Not only has the Aussie stopped declining, it has also managed to trade consistently above its 40-day moving average and is establishing an uptrend. Yesterday’s second consecutively higher close above the previous day’s high was the second buy signal flashed by this market in the past 12 trading days. A series of closes above the old swing high at .9134 in the June futures contract would break the “neckline” of a classic “reverse head and shoulders” bottoming formation and could propel the Aussie as high as our target of .9700 in the next few months.

The thing we like best about this chart setup is the risk point. We can reasonably risk two consecutively lower closes below swing lows at .8820. This is just a little more than 2 full points away from current levels. We are currently recommending the purchase of a straight call option for a total cost and risk of around $640 and the potential to be worth at least $4,000 should the Aussie reach our .9700 objective prior to option expiration. We will consider exiting to cut losses on two consecutively lower closes below our risk point of .8820 in the June futures contract.

Prices can and do change so RMB trading customers should contact their broker directly for further specifics on this trade. Your broker can also help you custom design a strategy based on your risk level and/or differing price targets.

If you are not an RMB Trading Customer and want to know more about how we are playing this or any other market, contact us or give us a call at 800-345-7026 (toll free) or 312-373-4970 (direct) and we’d be happy to go over some of our fixed- risk, “Big Move” strategies with you. You can also e-mail Put “Aussie” in the subject line.