Shanghai Composite Index - daily
What happens in China has a significant impact on Australia. Our understanding of the China market is not good.
What happens in China has a significant impact on Australia. Our understanding of the China market is not good.
In fact it’s so bad that this year some commentators gave reports of the Shanghai Index up and down moves even while the market was closed for a week Chinese New Year holiday!
Currently China drives the world while the US and Europe act as a drag on the world. Understanding the dynamics of the Shanghai index provides a useful background to influences on the Australian market. Takeover activity initiated by Chinese companies is only part of the story.
The China market started the recovery in November 2008, leading the US and Australian recovery by 5 months. The Shanghai Index rise ended in Nov 2009 and the market has developed a broad pattern of rally and retreat.
China has complex economy with all the inherent contradictions found in any well developed large economy. However the Chinese use different economic management methods.
The Western economic approach uses interest rates and this slows a broad range of economic activity. The Chinese use a much wider range of micro-management methods which are more precisely targeted.
The adjustment of the bank reserve ratio in January was a precisely targeted action and the February figures showed results. The fast paced bank lending was almost halved without the need to raise interest rates which inflict widespread collateral damage on other sectors of the economy.
The target is property bubbles and speculation, not the buyers of individual apartments. Beijing increased the deposit requirement to 20 percent of the minimum price of land on auction. The fall in property developers helped drag the Shanghai index down.
In contrast, Australia lifts the general interest rate and home buyers and business all feel the same impact.
Counter balancing this is the 45.7 percent rise in Chinese exports in February compared to February 2009. Despite the trade and tariff war noises coming from the US, the global economic system is starting to trade again. Given time this will encourage China to allow the value of the Yuan to rise.
The mainly domestically driven Chinese growth on 2009 has been replaced with caution and this is reflected in the broad pattern on the index. The chart behavior reflects the complexity of the Chinese economy (see chart above).
The developing activity in the Shanghai Index is inside a very large equilateral triangle. The recent rally and retreat pattern has confirmed the placement of the lower trend line 2. The lower edge of the equilateral triangle is defined by the uptrend line 2.
The upper edge of the equilateral triangle uses a down sloping trend line 1. The current value of the trend line is near 3200. This is a resistance level.
Inside this pattern there are two important resistance levels. The first important level is the historical resistance level near 3000. This is the upper edge of a resistance area that is from 2900 to 3000.
The value of the lower up sloping trend line in the equilateral triangle pattern is near 2950. The index has rebounded from this level and this suggests the up trend line is now the more important support level.
The centre line of the equilateral triangle pattern is near 3100. This has developed as a significant support and resistance level. This level is not exact but the index has developed reaction points near this level.
Currently the index activity is in the lower half of this equilateral triangle pattern. The up sloping trend line shows there is increasing bullish pressure in the market.
Investors are increasingly bullish so they are impatient to enter the market. When the market falls, they act more quickly and buy bargain priced stocks before the market rises again. This is the first bullish signal.
The 3100 level is providing resistance for this buying pressure. The second bullish signal is when the market is able to move above the 3100 resistance level.
The third bullish signal is when the market remains above the 3100 level and develops several tests of the resistance coming from the down sloping trend line 1. The current value of this trend line is near 3200.
The equilateral triangle is a pattern of indecision. It does not give a clear direction of the breakout from the pattern.
The base of the equilateral triangle is measured and used to calculate the breakout target level. A move above 3100 shifts the market balance towards the bulls. A sustained breakout above 3200 has a long term upside target near 4000.
*Guppy provides China market analysis to several Chinese language financial publications in China and to the English language China Daily.
Daryl Guppy, well-known international financial technical analysis expert. He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. His weekly analysis newsletters are followed in Asia and Australia.
Information provided is in the nature of general comment only and neither purports nor intends to be, specific trading advice.
