Time to Trade China Bull ETFs?

Chinese stocks have taken a beating in 2018 as companies that operate in the world's second largest economy succumbed to heavy selling pressure amid the fallout of a trade war with the United States and a slowing economy that has unnerved investors for most of the year.

However, since President Trump and his Chinese counterpart Xi Jinping struck a truce at the G-20 Summit in Argentina while trying to negotiate a steadfast and lasting trade agreement, Chinese stocks have outperformed the S&P 500 by 6% as of Dec. 18, 2018.

Last week's disappointing industrial output and retail sales data have several analysts speculating that China may also introduce more potent stimulus measures to combat its slowing economy. "'Chinese growth is still slowing and suggests that more vigorous policy stimulus is likely required to help stabilize it,' said Shane Oliver, head of investment strategy at AMP Capital Investors Limited (AMP.AX)," per Bloomberg.

These factors may give China bull exchange-traded funds (ETFs) a much needed lift and provide traders with a profitable short- to mid-term trading opportunity. Let's take a closer look at each fund in more detail.

Launched in 2004, the iShares China Large-Cap ETF (FXI) seeks to track the FTSE China 50 Index. As the benchmark index name suggests, the fund invests in the 50 largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange. As of Dec. 18, 2018, FXI offers an attractive 3.6% dividend yield and has returned -9.72% year to date (YTD). Performance has improved over the past month, with the ETF up nearly 1.5%. The fund is the largest China ETF with $5.84 billion in assets under management (AUM) and charges a 0.74% management fee.

After rallying strongly in January, FXI's price trended steadily lower before staging a 6.95% recovery in November. The ETF's share price appears to be forming an inverse head and shoulders pattern, which suggests a possible trend reversal to the upside. The price has recently retraced to an uptrend line that connects the pattern's head and right shoulder. Traders who enter at current levels should look to bank profits between $43 and $44, where the price may run into resistance at a downtrend line that extends back to late January and the 200-day simple moving average (SMA). Consider placing a stop under the November swing low to close losing trades.

The ProShares Ultra FTSE China 50 ETF (XPP), formed in mid-2009, attempts to provide twice the daily return of the FTSE China 50 Index, which has a tilt toward financial, telecom and energy companies. Short-term traders should be mindful that the ETF's average 0.69% spread easily erodes small intraday gains. Trading at $60.74 with AUM of $27.81 million and an expense ratio of 0.95%, the fund is down roughly 25% on the year but is sporting gains of 2.35% over the past month as of Dec. 18, 2018.

XPP's price closed Monday's trading session below the 50-day SMA but should find support from a recent trendline. Traders should seek an entry point near $60 with a stop-loss order placed below November's price consolidation. Take-profit orders could sit between $67 and $73, where the price is likely to find resistance from a downtrend line and the 200-day SMA.

With AUM of $325.65 million, the Direxion Daily FTSE China Bull 3X ETF (YINN) aims to provide three times the daily performance of the FTSE China 50 Index. A tight average spread of just 0.05% makes the fund suitable for both day traders and swing traders who want an aggressive bullish bet on Chinese stocks. The fund, created in 2009, has a YTD return of -41.44% but has returned 2.38% over the past month as of Dec. 18, 2018. YINN has an expense ratio of 1.03% and pays a 2.4% dividend yield.

Like FXI and XPP, YINN has tracked its benchmark index lower throughout most of 2018. Above-average volume entered the ETF in October and November as global equity market volatility increased. Over these two months, the ETF received a net inflow of $63.95 million. The fund's price currently sits at support on an uptrend line that dates back to late October. Conservative traders may want to wait for a reversal candlestick formation, such as a hammer or bullish engulfing pattern, before initiating a long position. Stops could sit below the reversal pattern used to enter the market. Consider placing a take-profit order at the $25 level – an area where the price may encounter resistance from a horizontal line and the falling 200-day SMA.