I was working in Shanghai two weeks ago and had the opportunity to talk with many investors. The general feeling is a fear that the moderation of the market is going too far, partly as a result of global influences. There is support for the strategy of “Removing the Firewood from Beneath the Cauldron” to avoid the market’s overheating. There is concern, however, that a sudden rainstorm from the West is cooling the cooking pot too quickly.
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Trends and trip points in Shanghai
Daryl Guppy
30 January 2010
I was working in Shanghai two weeks ago and had the opportunity to talk with many investors. The general feeling is a fear that the moderation of the market is going too far, partly as a result of global influences. There is support for the strategy of “Removing the Firewood from Beneath the Cauldron” to avoid the market’s overheating. There is concern, however, that a sudden rainstorm from the West is cooling the cooking pot too quickly.
The global market reaction to the proposed banking regulatory changes in the US has added a damper to an already-moderating China market. There is a genuine concern that the test of the 3,000 support area is a prelude to a broader fall in the market. There are several options for the nature of any fall and this will have an impact on regional markets.
Global markets have a common emerging feature. The sharp upwards momentum has moderated. Markets are re-testing support areas, which in some cases are a considerable distance below recent index values. The degree of correction is now large enough that it cannot be dismissed as a temporary trend weakness. The Shanghai market continues to show leadership in terms of market behaviour. The behaviour is around 10 weeks ahead of similar behaviour in US markets.
The degree of the move in the Shanghai market is in the order of three times the move in the US market. So, a 15% fall in the Shanghai index is mirrored by a 5% fall in the Dow Jones Industrial Average. The comparative volatility remains the same.
The behaviour of the Shanghai market has included sharply rising rally trends, followed by sharply falling retreats. On the weekly chart, this has the characteristics of a cup or cup-and-handle pattern, but these patterns did not develop successfully. A successful retest of support will confirm the continuation of a wide sideways trading pattern. This creates a range-bound market with limited trending activity.
Markets are efficient at recording the emotional behaviour of participants. They are less efficient at reflecting the economic fundamentals. They show a time lag, with markets changing trends several months before information on economic fundamentals is available. This belief is at the heart of technical and charting analysis. The Shanghai index has crossed some important trigger points in the week before last that quickly show how the emotions of the market are changing. The first important change was the move below the long term uptrend line 1. This index movement confirmed that the long-term uptrend has ended. The uptrend line 1 will now act as a new resistance level for any index rally. This development shows the market has stopped up trending and it is now moving into a different behaviour pattern.
There is a good historical support area level between 2,910 and 3,000, which forms the lower edge of a trading band. The upper edge of this trading band is near 3,400. This is a bullish analysis. In this situation, the market will continue to move between 2,910 and 3,400. This has rally trading opportunities but there is strong resistance fro
There is also very strong historical support in the area near 2,600 to 2,650. A fall below 2,910 has weak support near 2,750. The strongest support is in the 2,600 to 2,650 area. The market can reach this level by two methods. The first method is a continued downtrend fast fall to this level, which is very bearish. This fall would give a strong test to the support level. A fast fall to support could easily drop below the support level because it has strong downwards momentum.
The second method is shown with a down sloping trading channel. The upper edge of the channel is trend line A. The lower edge is trend line B. The market will soon prove whether this trend channel analysis is correct if the market continues to use trend line B as a support level. In this market condition, the market will continue to move more slowly towards the support level between 2,600 and 2,650. When the market reaches this level, there is a higher probability it will not fall below the support level.
The key features for the next few days is the behaviour of the index near the 2,950 to 3,000 support level, or if the index moves below this level and uses trend line B as the new support level. This will show whether the market will move in a sideways trading band or in a down sloping trading channel pattern.
The Shanghai market is quickly reflecting the concerns of Chinese investors. These concerns are also rippling through regional markets with tests of historical support levels. This is a time for protecting profits. (See Chart.)
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