China's Got Game

We're looking for a countertrend move for the S&P 500 within the context of a structural bear market to develop soon. If we do see a post-crash bounce occur at this point, we want to get the most out of it. The big interest rate cuts by the Chinese government should attract attention to this market in the coming weeks.

The idea of decoupling between the domestic and international markets is dead at this point. Most emerging markets essentially trade as high beta versions of the S&P 500. The most compelling market in our opinion is China. Chinese potential and growth has become a "throwaway" cliche for many traders, but it could be time to reassess the potential for a China trade at this point in the bear market.

The Chinese economy is slowing down as the world slides into recession, but it is still growing at a quick pace. Most projections put Chinese growth in the 7% range for 2009. The Chinese government is also moving aggressively to stimulate the economy, but unlike its Western counterparts, the Chinese have a lot of ammo in this department.

China steadily raised rates and bank reserves to slow the economy and fight inflation over the past two years. As the government unwinds these tightening measures, it could provide a strong stimulus to domestic growth. China will obviously suffer from export erosion, but we believe this has been accounted for with the 70% drop in the Chinese markets. If we see the bounce in the domestic market, it should be amplified in the Chinese market.

iShares FTSE/Xinhua China 25 Index Fund (FXI)

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The best way to buy China is to go long the iShares FTSE/Xinhua China 25 Index Fund (FXI - commentary - Cramer's Take), which tracks the Hang Seng closely. We see some interesting, but nascent technical changes in this ETF. The FXI hit a low in late October and met a higher low in mid-November. This is a potential double-bottom bullish reversal, but will not be confirmed until a breakout over $28.

Aggressive traders can initiate at $26, which is a break of the short-term downtrend line in anticipation of a breakout over the neckline, but this is vulnerable to a downside continuation. More conservative traders may want to wait until a breakout at $28 confirms the reversal pattern.

We would target the upper end of the downtrend channel for now, which puts a rally at $37. This is a 40% move from current prices, but be cautious about looking for anything beyond that at this time considering the long-term bearish structure of the market.

Know what you own: Some of the components of the iShares China 25 ETF include China Mobile LTD (CHL - commentary - Cramer's Take), China Life Insurance (LFC - commentary - Cramer's Take), China Petroleum & Chemical (SNP - commentary - Cramer's Take), China Unicom Hong Kong (CHU - commentary - Cramer's Take), CNOOC (CEO - commentary - Cramer's Take) and China Telecom Corp. (CHA - commentary - Cramer's Take).

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At the time of publication, John Hughes and Scott Maragioglio were long FXI. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.