(Oct 7): It appears that there is nothing so extreme that you can contemplate that cannot become a White House tweet. In recent weeks, in briefing notes and forums, we have canvassed the extreme perimeters of US President Donald Trump’s trade war with China. This included the idea that Trump would freeze Chinese assets in the US. We noted that his freezing of Venezuelan assets was a precursor to this possibility.
It was followed by calls from some Republicans, and endorsed by Trump, for US pension funds to withdraw investments from Chinese companies, and from index and managed funds that had exposure to Chinese companies. As with many of Trump’s tweets, many people chose to ignore this threat.
Chinese enterprises took these threats more seriously, with some major Chinese companies proposing to develop co-listings in Hong Kong, although momentum has been halted as a result of the current Hong Kong unrest. Alibaba Group Holding, Tencent Holdings and others may come to regret that delay.
At the far extremities, we canvassed the possibility of Trump’s suspending trading of China- listed stocks on Nasdaq and the New York Stock Exchange. Those extremes are no longer a distant possibility, with new reports that the White House is weighing a plan to stop Chinese companies from listing on US exchanges. This takes the trade war with China direct to Wall Street.
There are two reasons behind the collapse of the Dow Jones Industrial Average. The first is the delayed impact of Trump’s tariffs on the US economy. We anticipated this impact would come through during the mid-year company reporting season. We were out by a quarter. The results are coming in the current quarter reporting season. Trump’s trade war impacts all levels of the supply chain and many business models that underpin US prosperity. The proof is in the shock Purchasing Managers’ Index reading of below 50.
Wall Street is now seeing the numbers and Wall Street and Main Street do not like it.
The second reason for the Dow collapse is the existential threat to US capital markets by the forced withdrawal and redirection of capital. Trump’s advisers are exploring steps to limit financial investments between the US and China, including curbing the ability of US government pension funds to buy Chinese equities.
Nasdaq responded: “One critical quality of our capital markets is that we provide non-discriminatory and fair access to all eligible companies. The statutory obligation of all US equity exchanges to do so creates a vibrant market that provides diverse investment opportunities for US investors.”
As of February this year, 156 Chinese companies with a total market capitalisation of $US1.2 trillion ($1.66 trillion) were listed on the biggest US stock exchanges. Following these announcements, e-commerce giant Alibaba’s shares were down 5%, Baidu’s dropped almost 4% and online retailer JD.com’s were down 6%.
Not content with dismantling the global trade order, Trump now looks to the destruction of US capital markets. The impact on investment portfolios, asset allocation and market integrity is profound. This is sovereign risk at its worst and will reduce international capital flows.
Technical outlook for the Shanghai market
China markets are closed for the Golden Week holiday and the 70th anniversary celebrations. We use this break in trading to step back and take a longer-term view of the Shanghai Index using a weekly chart.
This sets an upside target near 3,280 to 3,300. The target is calculated by applying chart pattern analysis.
The long-term chart pattern is a cup pattern. A curved line is plotted touching the low points of the recent index activity. It is not as accurate as when applied to a daily chart, but it provides a good strategic guide to index development.
This is not a rounding bottom or saucer pattern because the low point of the pattern is not near the previous index low in 2018 of 2,440. The cup pattern follows the relatively rapid rise from 2,440 to 3,300. The pattern of retreat, consolidation and rebound creates the long-term cup pattern.
The pattern is useful because it is used to set high probability breakout targets. The curved line defines the cup. The horizontal line placed at the resistance points creates the lip of the cup. The distance between the lip of the cup and the deepest point of the pattern is measured. This value is projected upwards to give a high probability breakout target.
We could give you an interesting explanation as to why we think this method works, but in reality, no one really knows. What we do know is that this pattern and its projected targets have a high probability of success. The projected targets have an 80% probability of being achieved and are often exceeded. Strategically, this creates a bullish environment for the Shanghai Index.
When the index moves towards the right side of the projected pattern, there is the potential for a handle pattern to develop. A handle is when the index retreats from the lip of the cup and creates a downsloping retreat pattern defined by two parallel lines. The most significant impact of this development is to lower the final breakout target. The same projection value is used but it is applied to the point of breakout above the upper edge of the handle.
The final confirmed indication of a trend breakout is the rapid move above the value of the downtrend line. This rally developed in early September and was followed by a test of the resistance level. Investors watch for a pullback to test the value of the lower edge of the cup pattern with a rally rebound moving above the lip of the cup. An early sustained breakout can move very rapidly towards the 3,200-to-3,300 target level.
The cup breakout pattern is not a trend continuation pattern. Once the target is achieved, investors will watch for further developments to define the nature of the developing trend.
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 more than a decade. 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.
