When considering China markets, our focus tends to be on the Shanghai Composite Index, which has recently been in decline. A decade ago, there was a very high level of correlation between the behaviour of the Index and the behaviour of individual stocks.
Almost without exception, stock behaviour replicated the Index. If the Index went up, then most stocks went up. Of course, the reverse applied in a falling market. That made for easy trading in a bull market, but exceptionally difficult trading in a bear market because traders could only trade from the long side — buy low and sell higher. No shorting was permitted then, and nor is it permitted now.
Additionally, then as now, there is no intraday trading possible. This led to a well-established feature in the market where professional traders purchased near the end of the day so they could sell immediately tomorrow on stop loss if necessary.
The nature of the Shanghai market has changed and now it more closely resembles more mature Western markets. It is true that the range of trading instruments — Contract For Differences (CFD) options and warrants, for example — remain very limited. However, the correlation between individual stock behaviour and the behaviour of the market index has largely disappeared. This in turn has led to the application of a wider range of trading methods and analysis. The result is a more vibrant market with a greater range of opportunities.
Over the past two weeks, the broad market has fallen. A decade ago, this would lead to very slim pickings for long side traders. This year, the market fall has included a significant number of stocks that are moving counter trend to the market. There remained many long-side trading opportunities.
A retreating Shanghai Index is no longer a no-go area for long-side traders. There are many long-term and short-term trading opportunities available with stocks moving counter to the market trend.
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The emerging Western narrative is that the Chinese economy is in serious trouble and, by implication, the Shanghai Index is also in serious trouble. There are certainly problems in the Chinese economy, although they are not alone in facing significant economic challenges. Yet, the idea that there are no — or few — positive opportunities in China is not supported by the behaviour of many of the listed stocks in Shanghai and Shenzhen. They reflect an investment outlook that remains positive in many areas and which is driving up the values of many listed stocks.
Many traders feel uncomfortable with direct trading of the China market in individual stocks because they cannot undertake the usual fundamental research. The language barriers and sometimes opaque reporting are seen as barriers.
Still, a chart of price activity is understood and analysed in the same way, no matter its country of origin. It is this technical analysis approach that we apply when selecting trading opportunities each week. It is an approach that delivers good sustainable profits in all China market conditions.
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Technical outlook for the Shanghai market
The Shanghai Index has fallen below the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This is usually associated with a change in trend direction. Even so, the index has also successfully tested the historical support area near 3,220 and has developed a rebound.
It is too early to know if this support rebound will be successful but the rebound is a bullish note that suggests the recent pullback may be a temporary change in trend direction.
For the rebound to succeed and develop into an uptrend continuation it needs to close above the value of the upper edge of the short-term group of averages near 3,300.
Any rally from the current level faces two resistance barriers. One is historical and the other is dynamic. The historical resistance level is near 3,380. In late June, the Index moved above this level but failed to stay above this resistance area. Subsequently, the market retreated, breaking the three month uptrend line. Traders will watch closely to see if the index can break above this level in the future.
The dynamic index feature is created by the uptrend line that starts in May. This line is projected forward and will provide a further resistance feature that any rally must overcome before a new uptrend can be established. The current value of the uptrend line is near 3,440. However, this value will move steadily upwards as time passes.
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Up trend line A remains important. For several months, it acted as a support feature but in the future it will act as an additional resistance feature. If the market can rebound and move above historical resistance near 3,380 the value of trend line A will act as an additional resistance point to slow any future rally.
The leading indication of a sustainable rebound is when the short-term group of moving averages compress near the lower edge of the long-term group of moving averages. This is an indication that aggressive traders are entering the market in anticipation of a market rebound and rally. Currently, the key feature to watch is the index behaviour as any rally approaches the 3,380 resistance area.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. The writer owns China stock and index ETFs
