A look at the chart of the inverse China Stock Index ETF -- the ProShares UltraShort FTSE/XINHUA 25 Stock Index (FXP) -- suggests strongly that slowing Chinese growth and climbing inflation remain part of the problem, not part of the solution -- at least, not yet.

As we noted for subscribers last night, Wednesday's sharp afternoon advance in the FXP after the morning's weakness positions the inverse China ETF to accelerate to the upside towards a test of multi-month resistance between 32.00 and 33.00. If hurdled, this will confirm the upside breakout from a major base formation that has the potential to propel the FXP to 39.00-41.00 in the weeks ahead.

Let's notice that the price structure has carved out a significant "W" pattern, which represents accumulation of the FXP -- or price distribution within the iShares FTSE China 25 Index Fund (FXI). In either case, the pattern forewarns us to expect potentially serious negativity and equity liquidation in the China equity markets in the weeks immediately ahead.

While I have no idea what the fundamental story will be, I strongly suspect the global stock markets are entering a period of vulnerability to the China headline risk.

Unless the FXP reverses sharply and breaks below 28.30, today's upside breakout represents the initiation of the thrust towards 32.00-33.00.

By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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