Originally published by Guppytraders.com
World focus has been on the sudden freefall of the Dow Jones Industrial Average and for many, on the free fall in the Shanghai Index. For many the Dow fall had a benign inevitably – no need to panic. The fall in the Shanghai market had a more sinister inevitably – we gleefully told you the Chinese market would collapse.
If only the world were so simple. The Dow retreat, high to low was a little over 12%. Lets call the move past 10% an overshoot so this retreat is seen as a correction rather than a trend change.
The Shanghai Index fall is 14%. Given the higher level of background volatility in the Shanghai market its fair to call the move past 10% and overshoot.
But this is where similarities end. The fall in the Shanghai market is not the same as the fall in the Dow, although the increasing exposure to, and integration into the global financial system has exacerbated the fall.
Chinese New Year, or Spring Festival, is a hardy survivor of the Cultural Revolution purges. A Chinese New Year tradition that remains strongly in place is a house clean. This is literally a new broom and a clean sweep in preparation of the New Year. The custom is the origin of the English expression Spring Clean.
Traditionally, the house is swept, cleaned, and decorated for optimal feng shui. The financial market is no different. Poorly performing stocks are discarded. Investment portfolios are cleaned out and straightened up. Its a once a year rebalancing as the old is discarded to be replaced by the new after Chinese New Year.
This year the cleanout has been particularly vicious with a 14% fall in the Shanghai index..
The extent of the fall and the momentum of the fall was a major surprise. In much weaker market conditions in 2017 there was only a minor retreat prior to Chinese New Year. In 2018 the market was much stronger, although the very fast rise from December 2017 left room for a strong pullback and consolidation.
The little piles of discarded items that come with Chinese New Year traditions have a bright side. What has been discarded needs to be replaced by something new. On one level this gives a boost to the post-Chinese New Year retail sales. It also gives a boost to the Shanghai Index after the Chinese New Year holiday. Portfolios are rebuilt and this year the market post -Chinese New Years sales have some real bargains on offer. Aggressive traders are already positioning themselves to trade this market rebound from support levels
The fall in the Dow holds no firm promise of a rebound. The cultural traditions of China suggest the Shanghai Index will rebound when the market resumes trading after the Chinese New Year holiday shutdown.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.