China breaking out

The Shanghai appears to be breaking out of its small triangular formation. This coincides with a break of its downtrend, and a nice pattern on the intermediate termed momentum oscillator (RSI) and MACD. Stochastics, the fast moving indicator, is overbought – but can remain so while the other two catch up. Comparative strength vs. the S&P 500 is pretty flat, but at least it is no longer under-performing the US markets.


The Shanghai consists of both A and B shares – recall that A shares are generally considered of higher quality, given their typically larger market cap and supposedly better standardization of financial reporting. If you prefer to stay with the A shares, I have traded the BMO China ETF in the past (ZCH chart, below) which offer both currency hedging and A-share coverage. The triangular consolidation pattern has not broken on this chart and the downtrend has not broken. Probably best to wait for a breakout through about $19.50 before investing in this ETF.


The Rio Olympics is finished and Justin Trudeau now heads to China this morning for the start of his official visit. BNN reports that “while the dispute over canola imports is expected to be a major sticking point, China’s energy investments could also weigh on the talks.”

While on that subject…


A joke

I had to pass this one on.

To set this joke up, you may have read an article in Macleans magazine a while ago called “Justin Trudeau is un-smart like me” – link below:

So—here is the joke:

The story goes that Justin was discussing a minor earthquake affecting a small island off of Brazil during the Olympics. When being informed of this incident by his chief adviser Gerald Butts, he asked Mr. Butts if anyone was killed on the island during the quake. Mr. Butts replied “Just one Brazilian, sir.” Justin then proceeded to wail and fell to his knees in anguish. “Gosh, you are so very compassionate, Justin” said Mr. Butts.

Finally, Justin stopped crying and looked up at Mr. Butts, asking “Gerald, just how many people are one Brazilian?”


Anyhow, I will stick to my day job and leave comedy to the pro’s.

Have a great Monday!


Complete Video of Keith on BNN last week: Click here to watch it.


  • The article on IQ is a very accurate read on what is happening in the world.
    The ‘slightly brighter’ couples are having less kids or no kids at all.
    The ‘less bright’ couples are still having kids and maybe more.
    So when you do the averaging of the IQ numbers it is not surprising that the global average is going down.

    Society is to blame, since we have created a tax system that does not encourage motherhood.
    Not to mention that the current educational system keeps young adults in school far too long, resulting in later marriages, later births. Fertility drops off very significantly after 30 years of age, so couples who spend so much time in school and saving for an overpriced house, eventually try for children when it is getting almost too late.

    The solution, get rid of the current high-school system.
    Most of the education during the high school years is of little value to most kids when they look for work. By grade 8 it is very obvious, which kids should start a job apprenticeship and which should continue higher education at a much faster rate for those higher skilled jobs.

    Does every kid need to learn complex math? Really?

    Plus the current universities are cranking out hundreds of thousands of useless liberal art degrees, which is the cause of high student loan debt.

    There is always a solution, but the acceptance of reality for the lower half of the population is a major hurdle.

    • Yes–you might enjoy doing some reading on Libertarian thinking–basically that school of thought believes in privatization of most everything with only a few exceptions. A reduction of taxes and the ability to funnel that money by individuals into a private school system would likely be of more value given that those schools would become competitively focused (as all business is) and thus focus on offering job-orientated courses and future pathways.

    • I think I would recommand “Brave New World” from Adolf Huxley – seems to be closer to what you are getting at. The interesting thing about this book is that you can take both ways depending on how you read it -both a case for or against the idea that the world would be better if we just let the dumb be dumb and the smart be smart.

      But…. the beginning of the argument is dubious in my opinion – there are no serious studies, at least to my knowledge, that link parents of marginally lower IQ to children of similarly lower IQ (Maclean’s, unfortunately, does not deem it worthwile to cite their “one analysis”). E.g. we’re not talking about basket cases, so let’s call it the 1/3rd of people between 85-100, e.g. just below average since it seems to be what you are concerned about if I understand you right. The other weakness in that line of thinking is that there is a lot of debate about exactly what is intelligence – IQ is just an indicator that we’ve designed to try to track it, however trying to assess a mind’s value added to society based on IQ is pretty much like buying all your stocks solely based on MACD.

      The next part of the argument, that ultimately the tax system is to blame (along with our education system over emphasizing higher education), could be an explanation for the generally observed trend that better-off individual tend to have fewer kids. I would tend to agree on that observation that observation that well-off have fewer kids (see link with plenty of graphs below). In our society. Very recently. As I assume you would take Canada as your population, and the last 20, perhaps 30 years at most since both the tax system & the education patterns would be different before that if you enlarge the focus too much.

      However, given this pattern is observed pretty much accross all modern societies with data from 1960, so going back somewhat earlier than the timeframe on which your argument rests, I’m not sure it matters. This trend is also observed in the US with data going back to 1828 – here MUCH larger timeframe (even ignoring the fact that US’s tax & education system are rather different than Canada’s).


      But I digress – yeah, China appears to be breaking out… But quite frankly, regardless of the technicals, I am not much interested in the Chinese stock market – there is too much question IMO on the quality and reliability of the data that comes out of this market. While the same might be argued of all developping markets, there is a sense with China that on top of the difficulty of obtaining accurate data in less mature economies, there may actual manipulation of the data going on. Hence any technical signal to buy in that case is somewhat at the mercy of reality catching up. Not necessarily worth the risk IMO….

      • My wife had an interesting comment this morning regarding IQ. She noted that sometimes when kids get too much – i.e as our standard of living increases, or if kids are “spoiled” (so to speak) by parents, the kids may grow up without having to figure out how they will overcome challenges that past generations had to face. This possibly impedes their creative problem solving abilities.
        But, as you note, we digress…
        China is a higher risk/ higher reward trade. And that’s the way it often works, isn’t it?

        • For sure agreed on the risk/reward. However, regarding China & the data on which the performance of that market is partly based, I think there are fundamental differences with other emerging markets.

          Let’s look at it this way: all emerging have a similar known unknown, which is reliability of the data, because it is harder to capture reliable metrics in less mature markets. You get paid for that, on top of all other risks involved in the stock market. However, for China, there is an additional known unknown on this aspect, which is to some extend an intentional manipulation of the data by the government & government agencies for political reasons. What we don’t know here, again, is the extend of that manipulation, but I think it’s fair to say that there is at least some level of this. I’m not a conspiration theory guy, perhaps it’s not that significant (but then Enron, Worldcom & such were also brought down by manipulation of their numbers, which at some point were not significant until they were).

          Do we get paid for that additional risk when investing in China? Of course this is arguable. It is a formidable market. If you believe the market are efficient, then you have to think you do. However my reckoning is that investors are willing to let China get away with things that they wouldn’t accept elsewhere, partly because of sheer size & potential for growth just due to that size. Hence I am not sure we do, therefore the risk/reward with China, IMO, isn’t as good as one might think.

  • No offense Keith…..but I fear that comedy is not one of your strengths. 🙂

      • Would not advise Keith to try political commentary. He is “JUST Not Ready”.
        Perhaps poor judgment is no detriment in economics?

  • Hi Keith

    I hope this was posted on the right place.

    My question pertains to stochastics. Sometimes I find stochastics reach an overbought region and the stock price continues to rise, and in other situations the stochastics reach an overbought region and stock prices will start to fall. I was just curious to know if there was a parameter or a strategy to reliably predict the direction of the stock when overbought regions are reached.

    thank you

    • Sash – I am glad you posted this question. Actually, today’s charts show you how best to use stochastics in conjunction with other momentum oscillators. You will note that stochastics went overbought in late 2014 and stayed overbought into 1st quarter 2015. Stochastics, at least if you use the typical default setting, is a fast acting indicator and can whip into overbought/sold well ahead of time. RSI (default 14 bar) is slower–and default MACD is slower still (2 MA’s are plotted for their net difference so it takes longer to move).
      Note how MACD crossed over at the right time (coincident with the top in 2015) while stochastics and RSI had been overbought for a while. So the big moves are better with slower indicators, while stochastics is great for short termed moves–and the quick acting nature of the indicator can put it into overbought and oversold levels for long periods of time.

      I use two systems- a short timing method and long timing method. Search the blog and you will see me reference both of them. The long timing method looks only at “big picture” stuff (which by the way went bearish a week ago). The short one can give up/down buy and sell signals over a week or two at a time! Here is a blog from more than a month ago illustrating both systems–its not current for the signals but it does help demonstrate the 2 concepts:

      You might want to invest $20 to buy my book Sideways on Amazon or Indigo – or come out to the Moneyshow on Sept 16th if you live near Toronto–I’ll be speaking at the metro Convention Cr at 12:45 and do tend to bring books along for sale at a discount.


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