Originally published by Guppytraders.com
There is a persistent media approach that always finds something to criticize about the Chinese economy. China growth is on track, but the reports are always tempered by warnings of doom, or suspect economic figures. Despite this, the Chinese economy remains robust and healthy.
China's economic strength is reflected in the Shanghai index, with its strong rally. The key breakout is the move above the value of the long term uptrend line. The breakout has an initial target near 3650. The uptrend line started in 2017 May and acted as a support feature until 2017 November when the index moved below the trend line. The trend line was tested five times as a support feature so it has a confirmed and powerful influence on the market. The new breakout above the value of this line means it will now act as a support feature.
Traders expected the market to use the trend line as a resistance and consolidation level, but this did not develop. The rapid breakout above this level demonstrates the exceptional bullishness in the market.
A pullback is inevitable but there is a high probability that the value of the trend line will act as a support feature and provide a buying opportunity. The Shanghai index uptrend reversal started in 2018, January. The trend reversal anticipated the release of economic growth figures. The rally has delivered good returns for traders but the speed of the breakout rally brings its own risk. These fast rallies do not continue at break neck speed for many months. A pullback is inevitable and the nature of that pullback helps to define the nature of the longer term uptrend.
The Shanghai Index has three support features . The first is the value of the long term uptrend line. The second is the historical support near 3440. The third is the value of the long term group of averages in the GMMA indicator. This is like an airbag. Wide separation in the long term GMMA means that investor buying absorbs the impact of an index retreat and provides a base for a rally rebound.
Traders watch for this pullback consolidation to develop. The future pattern of retreat and rebound rally will set the first anchor point for a new and stable uptrend line.
Chinese market strength should be bullish for the Australian market, and for the Australian dollar. In recent months it appears that Australia is doing its best to discourage Chinese investment with specific taxes and fees, a broader attack on so-called China soft power and partnering with others in an attempt to hobble China's Belt and Road Initiatives. This creates fractious cracks in the co-dependant relationship that has underpinned Australia’s economic growth and heightens a sovereign risk element for investment in Australian equities. Investors in Australian equities will carefully watch the Australia-China relationship.
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.