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Shanghai Rally Fails

Published 29/10/2018, 01:09 pm
Updated 09/07/2023, 08:32 pm

Originally published by guppytraders.com

The Shanghai Index downtrend seems relentless. The index rallied strongly from 2449 but failed to test the significant resistance level near 2695. The rally touched the lower edge of the long term Guppy Multiple Moving Average (GMMA) indicator and then retreated. The rally was not a serious challenge to the dominance of the downtrend. The long term GMMA group of averages shows no indication of compression and this shows that investors remain committed sellers.

The rally rebound was not part of a V shaped recovery. This type of recovery is a characteristic pattern of the Shanghai Index. The probability of a strong V shaped rebound trend recovery remains very low because of the strength of investor selling. A V shaped rebound quickly leads to compression in the long term GMMA as investors pile into the rally and support the rebound. These essential features were missing from last weeks rally.

Traders wait for a consolidation pattern to develop. Consolidation is when the index moves sideways without any trending activity. The increase in Index volatility works against the potential to develop a consolidation pattern. The large falls in the US markets also add to the downward pressure on all international markets so its too soon to look for the beginning of a consolidation pattern.

The weekly and monthly chart provide some indication of where the next support level is located. The first strong support level is near 2400. This acted as a support level in 2010 and it acted as a resistance level in 2012 and 2013. Historically there is no strong support level between 2690 and 2400 so there is a very low probability that the index will find support above 2400.

Despite strong rallies, the secular trend remains down. Rallies, as shown last week, are short-lived events with limited trading opportunities from the long side. Investors and traders will stay out of the market until support is proved near 2400.

As the index approaches 2400 traders watch for evidence of slowing momentum and weak rally rebounds. A fall of this magnitude means it will take some time for a new uptrend to develop.

Does the Shanghai index reflect the real economy? Having spent several weeks in China over the past few months the answer has to be “No.

There are several reasons for this. The financial markets are not seen as a store of wealth for most Chinese. It is one means of creating wealth through capital gains. This willingness to get into and out of the market makes the financial market less reflective of the state of the economy.

According to some the Chinese economy is on its knees and President Trump is winning the trade war. If this is true then somebody forgot to tell Chinese consumers. The level of expenditure on discretionary items continues to rise. The number of travellers who took expensive holidays during the Golden Week holidays hit a record high. If you are not confident about the future then one of the first things you cut back on is expensive overseas holidays.

The US China trade friction has hurt market sentiment but there are good buying opportunities. Insurance companies, security firms and energy companies are buying opportunities because they are not sensitive to international markets or trade.

Shanghai Index

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.

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