UPDATE: Time To Take (some) Profits In China ADR’s

On July 29, we posted a chart showing the breakout in the Bank of New York Mellon China ADR Index. The index not only broke out to a 6-year high but it did so convincingly, on the largest weekly gain in 3 years. After briefly testing the breakout point, China ADR’s have followed through brilliantly to the upside, climbing by about 10% in the past month.

At the time, we noted that the first serious resistance may come at the 61.8% Fibonacci Retracement of the 2007-2008 decline at around 519. The Index is now trading at precisely that level. Thus, we view it as an attractive spot to take “some” profits.

We say “some” because, considering the strength of the breakout and strong follow-through, there is probably a high probability that the run is not over to the upside (and maybe not even close to over). Since we always like to let winners run, we’d keep the majority of the position. However, this would be a logical point for at least a pause so taking 10-20% off the table is not a bad idea.

Consider it house money. If the index does not so much as pause and keeps running higher, you still have the majority of the original position. If Chinese ADR’s do pull back, the position can be bought back for a potential next up leg.

How deep could a pullback be? Though it would not be the most ideal scenario for longs, the reality is that Chinese ADR’s could possibly pull back all the way to the breakout point without invalidating the breakout or uptrend. If it did, investors will be happy that they at least took some money off the table.