When someone shares with you something of value, you have an obligation to share it with others.
Sunday, 17 January 2010
Daryl Guppy: China trending behaviour includes increased volatility
The Shanghai market continues to encounter resistance between 3,300 and 3,400. For the bulls, this is evidence of a developing trend breakout. For the bears, it is evidence of an unsustainable bubble leading to a market crash.
Daryl Guppy: China trending behaviour includes increased volatility
Daryl Guppy 12 January 2010
The Shanghai market continues to encounter resistance between 3,300 and 3,400. For the bulls, this is evidence of a developing trend breakout. For the bears, it is evidence of an unsustainable bubble leading to a market crash.
There is some profoundly bearish commentary about the bubble in the Chinese market and, if it is correct, it is a cause for concern for other regional markets. The rise in the Hang Seng, the Taiex, the Kospi and the Straits Times Index has been, to a significant extent, on the back of the rise in the Shanghai Composite Index.
The first bubble-bear argument is that China’s growth will stall without a growth in exports. In 2009, its economy grew more than 8%, despite a 10% decline in exports. The Chinese have a high savings rate of 35% and a very high home ownership rate in what is now one of the world’s strongest property markets. Chinese households have massive purchasing power. High savings, combined with rising real-estate wealth and rising incomes, means Chinese domestic consumption has nowhere to go but up.
The second bubble-bear argument suggests that the government stimulus spending was largely wasted. Funding went to state-owned enterprises, partly because they could act quickly to put the spending to work. The infrastructure investments improved China’s transportation and communication system. China has a need for infrastructure spending because it lays the foundation for economic growth. This spending makes more economic sense than using government funds to bail out banks and pay bankers’ bonuses.
The third-bubble bear argument tells us that excess liquidity will fuel the bubble. Creating excess liquidity helped the Chinese economy recover quickly from the global economic slump. It’s the same method used by other economies, but with one important difference. The high Chinese savings rate means the liquidity is not fuelled by credit-creation methods that rely on quantitative easing, or printing money. The Chinese have a high savings rate and generally use very little credit. The limited use of financial leverage helps prevent speculative bubbles from imploding.
Unlike 2007, the recovery in 2009 did not develop a parabolic trend. The trend behaviour in 2009 has laid good foundations for a continuation of sustainable trend behaviour in 2010 and this reflects the sustainability of economic growth.
There are four defining features on the Shanghai Composite Index chart. The first feature is the strength of the resistance area between 3,300 and 3,400. The 3,400 level was the target level for the cup-and handle pattern. And, 3,300 is also a strong historical resistance level.
The strong reaction away from the resistance level between 3,300 and 3,400 is not a surprise. There is a high probability the market would retreat from this resistance level and then make a new attempt to move above it. This is an important barrier to the uptrend and, when it is broken, it will allow the market to move upwards very quickly. A breakout above 3,400 could be very strong.
The second feature is the influence of the support and resistance levels near 3,000. This is a strong historical support level. This level continued to provide very good support when the market retreated in December. The market rebound developed from near 3,050, and this confirms the power of this support area.
The third feature is the longer term trend line. The longer-term trend line 1 begins in November 2008 and uses the low of December 2008 and March 2009 and September 2009 to calculate the correct position of the uptrend line. This was confirmed as a strong support feature for the rising trend.
The current value of the longer term trend line 1 is near 3,040. This value is above the value of the support and resistance levels near 3,000. The value of the longer term trend line 1 will act as a new support level for a long-term trend rise. Any market retreat will use the trend line as a support level and this gives more bullish strength to the market development, reducing the probability of a re-test of support near 3,000.
The position of the longer-term trend line 1 is not exact. If necessary, this line will be adjusted to include future Shanghai Composite Index rebound activity. This line is used as a support area rather than an exact support value.
The fourth important feature is the shorter-term uptrend line 2, which starts from the December 2008 low. It uses the March 2009 lows as the second anchor point for the trend line. The August lows are used as the third point for the trend line.
The shorter-term trend line acts as a resistance area. The line is not used as an exact resistance value, but it is important as a resistance area. The longer- and shorter-term trend lines are not parallel lines. The separation between the two lines is expanding. The general trend is upwards, but the trend behaviour shows rally-and-retreat patterns. The increasing separation allows for higher and faster rallies, but it also allows for larger and faster market retreats. This separation will increase the volatility of the rally-and-retreat behaviour, which has many short-term trading opportunities.
2 comments:
Daryl Guppy: China trending behaviour includes increased volatility
Daryl Guppy
12 January 2010
The Shanghai market continues to encounter resistance between 3,300 and 3,400. For the bulls, this is evidence of a developing trend breakout. For the bears, it is evidence of an unsustainable bubble leading to a market crash.
There is some profoundly bearish commentary about the bubble in the Chinese market and, if it is correct, it is a cause for concern for other regional markets. The rise in the Hang Seng, the Taiex, the Kospi and the Straits Times Index has been, to a significant extent, on the back of the rise in the Shanghai Composite Index.
The first bubble-bear argument is that China’s growth will stall without a growth in exports. In 2009, its economy grew more than 8%, despite a 10% decline in exports. The Chinese have a high savings rate of 35% and a very high home ownership rate in what is now one of the world’s strongest property markets. Chinese households have massive purchasing power. High savings, combined with rising real-estate wealth and rising incomes, means Chinese domestic consumption has nowhere to go but up.
The second bubble-bear argument suggests that the government stimulus spending was largely wasted. Funding went to state-owned enterprises, partly because they could act quickly to put the spending to work. The infrastructure investments improved China’s transportation and communication system. China has a need for infrastructure spending because it lays the foundation for economic growth. This spending makes more economic sense than using government funds to bail out banks and pay bankers’ bonuses.
The third-bubble bear argument tells us that excess liquidity will fuel the bubble. Creating excess liquidity helped the Chinese economy recover quickly from the global economic slump. It’s the same method used by other economies, but with one important difference. The high Chinese savings rate means the liquidity is not fuelled by credit-creation methods that rely on quantitative easing, or printing money. The Chinese have a high savings rate and generally use very little credit. The limited use of financial leverage helps prevent speculative bubbles from imploding.
Unlike 2007, the recovery in 2009 did not develop a parabolic trend. The trend behaviour in 2009 has laid good foundations for a continuation of sustainable trend behaviour in 2010 and this reflects the sustainability of economic growth.
There are four defining features on the Shanghai Composite Index chart. The first feature is the strength of the resistance area between 3,300 and 3,400. The 3,400 level was the target level for the cup-and handle pattern. And, 3,300 is also a strong historical resistance level.
The strong reaction away from the resistance level between 3,300 and 3,400 is not a surprise. There is a high probability the market would retreat from this resistance level and then make a new attempt to move above it. This is an important barrier to the uptrend and, when it is broken, it will allow the market to move upwards very quickly. A breakout above 3,400 could be very strong.
The second feature is the influence of the support and resistance levels near 3,000. This is a strong historical support level. This level continued to provide very good support when the market retreated in December. The market rebound developed from near 3,050, and this confirms the power of this support area.
The third feature is the longer term trend line. The longer-term trend line 1 begins in November 2008 and uses the low of December 2008 and March 2009 and September 2009 to calculate the correct position of the uptrend line. This was confirmed as a strong support feature for the rising trend.
The current value of the longer term trend line 1 is near 3,040. This value is above the value of the support and resistance levels near 3,000. The value of the longer term trend line 1 will act as a new support level for a long-term trend rise. Any market retreat will use the trend line as a support level and this gives more bullish strength to the market development, reducing the probability of a re-test of support near 3,000.
The position of the longer-term trend line 1 is not exact. If necessary, this line will be adjusted to include future Shanghai Composite Index rebound activity. This line is used as a support area rather than an exact support value.
The fourth important feature is the shorter-term uptrend line 2, which starts from the December 2008 low. It uses the March 2009 lows as the second anchor point for the trend line. The August lows are used as the third point for the trend line.
The shorter-term trend line acts as a resistance area. The line is not used as an exact resistance value, but it is important as a resistance area. The longer- and shorter-term trend lines are not parallel lines. The separation between the two lines is expanding. The general trend is upwards, but the trend behaviour shows rally-and-retreat patterns. The increasing separation allows for higher and faster rallies, but it also allows for larger and faster market retreats. This separation will increase the volatility of the rally-and-retreat behaviour, which has many short-term trading opportunities.
Post a Comment