NEW YORK (TheStreet) -- You could speculate on what Greece will do next, which has implications for what Spain, Italy, France and other eurozone members will do, but you would need the insight of a god to get that right.
Being only mortal, it's unlikely you would get it right enough to make any profit, especially because it would involve a combination of emotions and money, a mixture that almost always ends in disaster.
That's why on Sunday, exchange-traded funds that track various international stock markets were run through the Decision Support Engine, a system that objectively ranks the probability of future price behavior based on historic cause-and-effect correlations. Surprisingly, most markets are currently in position that don't trigger DSE-based actions. There is, however, one that does.
It does it in a big way, too, without ambiguity: China.
The following monthly chart of the iShares FTSE/Xinhua China 25 Index (FXI - Get Report) shows the past 10 years of price behavior. But, more importantly, the pattern that has been manifested by the crowd of global investors and traders is one that has repeated for at least a century, if not longer, on certain markets that have data that far back.
Yellow boxes in both the price chart (upper pane) and the stochastic study (lower pane) show when monthly stochastics were around the 90% extreme overbought threshold and/or when price was deviating from the long-term moving average (200-day) by two standard deviations (which statistically includes 95% of normality).
The gold bands above and below the black price bars are labeled "2 Band" and show what can happen when investors and traders get so emotional that they buy into a trend that has aged and/or fail to protect profits and capital. They tend to wish they'd had a tool that warned them to take action, as prices almost always reversed and declined sharply.
This just happened again in the last few months, and the reversal is early in development. Let's ask the Decision Support question: "If I had no capital in this market, would I take a buy or sell action at this moment?" The answer is clear: sell. Therefore, if you're long (especially if you're leveraged), reducing exposure or eliminating it is strongly suggested. If you're flat, a sell action can be used to get short. And, if you're already short, the position should be maintained, or added to.
Further, notice that it has been seven years since the last buy signal was given. That was when the stochastics were around the 10% extreme oversold threshold and/or price was deviating far enough below the long term moving average by two standard deviations.
It's not that one can't speculate or invest successfully when both of these conditions are not simultaneously present. When both are present, however, the probability ranking of the outcome is much higher. The green bubbles show what the price and stochastic conditions look like when a high probability-ranked buy signal is upon this market. Current conditions are clearly consistent with selling actions, not buying actions.
The narrowing trading range of the stochastics is warning that a break of the uptrend line off the 2008, 2011, and 2013 rising bottoms will be broken on the coming test of that dark blue line. One reason this likely will be the case is that the stochastics just reversed off the most overbought extreme they've reached since the 2007 peak, while price didn't come close to the 2007 extreme. This is bearish divergence, and another, independent, reason to reduce/eliminate long exposure.
These are some of the components that the DSE weighs in order to objectively generate buy/sell/hold signals. Coupled with several of the others, which can't be easily discussed here, an action plan could look as follows.
If long, $44 should be used as a stop loss, where a closing price below that level triggers some reduction of long exposure. If a bounce into the $47 area occurs first, you should reduce your long exposure up there. If you're flat, either or both of these conditions can be used to get short exposure established, using $52.65 as a buy stop.
You might ask yourself what economic conditions it would take to get this China ETF to decline back toward the green bubble that was drawn on the chart out in 2017. One can't know specifically what they'd be now. But looking back at the conditions present from 2007 to 2009, one can infer they would be pretty bad.
Objectively speaking, the DSE suggests running, not walking, out of China!