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Sunday 24 January 2010
China roars into the Year of the Tiger
In recent weeks, many analysts have commented that the China market is too hot. They warned of a market bubble or a property bubble. They suggested the Chinese government should do something quickly to cool the speculation and the property market.
In recent weeks, many analysts have commented that the China market is too hot. They warned of a market bubble or a property bubble. They suggested the Chinese government should do something quickly to cool the speculation and the property market.
Last week, the government moved consistent with this advice by raising the bank reserve ratios by 50 basis points, and effectively putting a small cap on lending. The new reserve rate will remove about RMB300 billion ($61 billion) for the loans pool. Chinese banks lent more than 25 times this amount in the past 13 months, so the move is unlikely to cause any significant monetary tightening.
The market response globally was shock. The move was blamed for the marked negative reaction in regional markets, and also in European and US markets. It used to be that when the Dow Jones Industrial Average sneezed, we got a cold. Now, when China sniffles, the US gets the flu and we get aches and pains. Welcome to the strange world of extreme market emotions, where markets can be whipped about by rapid, and perhaps not fully considered, reactions to breaking news. It may be a case of “be careful what you wish for”.
The Shanghai market reaction was a little more interesting. On the day prior to the announcement, the market fell sharply. On the day of the announcement, the market staged a strong recovery, perhaps welcoming the news that action was being taken to reduce the chances of a bubble developing.
The China economy was carefully and successfully managed in 2008 and 2009. Policy decisions were carefully considered and implemented effectively. In common with Western markets, it was a hard landing but, unlike Western markets, the recovery has been very well managed. China has quietly slipped into the No 2 exporter position, overtaking Germany. There is little reason to suspect that this good management will fail when it comes to winding back stimulus measures without damaging the economic recovery. The optimism is reflected in the Shanghai Index chart.
Last August, the Shanghai Index developed a sharp trend correction using price and fell rapidly. In September, the market moved sideways in a trading band — a trend correction using time. The upper limit of the rallies was created by the strong resistance area near 3,000 to 3,050. The support for this long-term trend came from the longterm trend line 1. The successful breakout above this resistance level last October established an up-sloping trading channel.
The upper edge of the trading channel is defined by the shorter-term trend line 2. This is not an exact value. Trend line 2 acts as a resistance area for the up-sloping trading channel.
There are two types of behaviour that can develop in a trading channel. The first is where there are rapid rebounds from the support trend line followed by rapid retreats from the resistance trend line, creating very rapid trading opportunities. This has not developed with the Shanghai trading channel.
The second is when the rally rebound develops and moves to the upper resistance level. Then the market drifts sideways until the lower trend line support level area is reached, followed by another rally rebound. This is the broad type of market activity developing with the Shanghai Index. As the index approaches trend line 1, a rally develops, but the rally does not move to the area of trend line 2. In recent weeks, the rally behaviour has found strong resistance between 3,300 and 3,350.
This strong resistance area suggests that any successful breakout above this level will also be very strong, which is a contradiction. The more frequently the resistance area is hit and the index retreats, the stronger the resistance area. When the resistance area is finally successfully broken, it often leads to a very rapid trend rise. The old strong resistance area then becomes a strong support area.
The sideways correction in the trend has two very strong support areas. The highest support area comes from the value of the longer-term trend line 1. The position of this line is not exact but it provides a strong support area. There is a high probability that trend line 1 will define the continuation of the strong trend.
The lower support area is the horizontal support line near 3,000, a well-tested historical level in the market. The value of trend line 1 is above the 3,000 support level, providing an additional level of support for any temporary index move below the value of trend line 1.
This combination of support features confirms the higher probability of a continuation of the long-term uptrend recovery in the Shanghai Index. A successful move above resistance near 3,350 has an upside target near 4,200. The behaviour of the market suggests this would then be followed by a broad sideways movement using the 3,300 to 3,350 level as a new support level. This has the potential to develop into a powerful and reliable step-and-stairway trend pattern.
The announcement last week of the long-awaited Shanghai Futures Index trading and the ability to trade short will improve the maturity of market-trending behaviour. The China market is dominated by retail traders. The ability to trade short will provide traders with options in a falling market. Previously, the only option was to sell quickly — and contribute to the fall — or sit it out and hope for a recovery. This leads to lots of breakeven selling as the recovery develops and creates strong resistance levels that stall the new uptrends. These announcements improve the market mechanisms and improve trend stability.
2 comments:
China roars into the Year of the Tiger
Daryl Guppy
16 January 2010
In recent weeks, many analysts have commented that the China market is too hot. They warned of a market bubble or a property bubble. They suggested the Chinese government should do something quickly to cool the speculation and the property market.
Last week, the government moved consistent with this advice by raising the bank reserve ratios by 50 basis points, and effectively putting a small cap on lending. The new reserve rate will remove about RMB300 billion ($61 billion) for the loans pool. Chinese banks lent more than 25 times this amount in the past 13 months, so the move is unlikely to cause any significant monetary tightening.
The market response globally was shock. The move was blamed for the marked negative reaction in regional markets, and also in European and US markets. It used to be that when the Dow Jones Industrial Average sneezed, we got a cold. Now, when China sniffles, the US gets the flu and we get aches and pains. Welcome to the strange world of extreme market emotions, where markets can be whipped about by rapid, and perhaps not fully considered, reactions to breaking news. It may be a case of “be careful what you wish for”.
The Shanghai market reaction was a little more interesting. On the day prior to the announcement, the market fell sharply. On the day of the announcement, the market staged a strong recovery, perhaps welcoming the news that action was being taken to reduce the chances of a bubble developing.
The China economy was carefully and successfully managed in 2008 and 2009. Policy decisions were carefully considered and implemented effectively. In common with Western markets, it was a hard landing but, unlike Western markets, the recovery has been very well managed. China has quietly slipped into the No 2 exporter position, overtaking Germany. There is little reason to suspect that this good management will fail when it comes to winding back stimulus measures without damaging the economic recovery. The optimism is reflected in the Shanghai Index chart.
Last August, the Shanghai Index developed a sharp trend correction using price and fell rapidly. In September, the market moved sideways in a trading band — a trend correction using time. The upper limit of the rallies was created by the strong resistance area near 3,000 to 3,050. The support for this long-term trend came from the longterm trend line 1. The successful breakout above this resistance level last October established an up-sloping trading channel.
The upper edge of the trading channel is defined by the shorter-term trend line 2. This is not an exact value. Trend line 2 acts as a resistance area for the up-sloping trading channel.
There are two types of behaviour that can develop in a trading channel. The first is where there are rapid rebounds from the support trend line followed by rapid retreats from the resistance trend line, creating very rapid trading opportunities. This has not developed with the Shanghai trading channel.
The second is when the rally rebound develops and moves to the upper resistance level. Then the market drifts sideways until the lower trend line support level area is reached, followed by another rally rebound. This is the broad type of market activity developing with the Shanghai Index. As the index approaches trend line 1, a rally develops, but the rally does not move to the area of trend line 2. In recent weeks, the rally behaviour has found strong resistance between 3,300 and 3,350.
This strong resistance area suggests that any successful breakout above this level will also be very strong, which is a contradiction. The more frequently the resistance area is hit and the index retreats, the stronger the resistance area. When the resistance area is finally successfully broken, it often leads to a very rapid trend rise. The old strong resistance area then becomes a strong support area.
The sideways correction in the trend has two very strong support areas. The highest support area comes from the value of the longer-term trend line 1. The position of this line is not exact but it provides a strong support area. There is a high probability that trend line 1 will define the continuation of the strong trend.
The lower support area is the horizontal support line near 3,000, a well-tested historical level in the market. The value of trend line 1 is above the 3,000 support level, providing an additional level of support for any temporary index move below the value of trend line 1.
This combination of support features confirms the higher probability of a continuation of the long-term uptrend recovery in the Shanghai Index. A successful move above resistance near 3,350 has an upside target near 4,200. The behaviour of the market suggests this would then be followed by a broad sideways movement using the 3,300 to 3,350 level as a new support level. This has the potential to develop into a powerful and reliable step-and-stairway trend pattern.
The announcement last week of the long-awaited Shanghai Futures Index trading and the ability to trade short will improve the maturity of market-trending behaviour. The China market is dominated by retail traders. The ability to trade short will provide traders with options in a falling market. Previously, the only option was to sell quickly — and contribute to the fall — or sit it out and hope for a recovery. This leads to lots of breakeven selling as the recovery develops and creates strong resistance levels that stall the new uptrends. These announcements improve the market mechanisms and improve trend stability.
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