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Shanghai Composite – bounce needed to confirm recovery

Posted By Lance Lai On In Markets | No Comments

Greetings from Manila, Philippines.

The Shanghai Index has traded as expected over the past six months, falling “frighteningly” to a low just to test our convictions, then powering up again beyond reason, only now to settle in the middle.

What does it all mean?

Over the past five years, as the global financial crisis unfolded, the reliance on China has been key to the world’s recovery. The question is, how key will it remain in the future? A significant transference of “real wealth” has already happened from West to East over the past five years. Will the emphasis shift back to the West sometime soon?

Probably, yes.

It remains though, if China’s index does not continue to recover in unison with the western indices, the road ahead for us all will be turbulent.

Below we have five bullish indicators against three bearish ones. The balance is tipped on the side of positivity.

Should we begin to see confirmed positivity in this index, as indicated by five versus three indicators, the likelihood of a deeper pullback in the western indices will become more remote.

If Shanghai is consolidating, as it appears to be, we should see the next level of bullishness across most global indices.

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Bullish indicators

  1. 200-day moving average has flattened out;
  2. Back on 29 November, when the index was 1,975, I expected a bounce from around 1,962. Five days later on 4 December, the index bottomed at 1,949, about half a percent lower than my sought for level;
  3. Ideal pullback from recent high has been achieved of between 2,190 and 2,134. This was exactly as anticipated. A low of 2,161 was reached;
  4. Holding above the 200-day moving average now; and
  5. Other indicators are trying to complete retracement and trying to turn up – could be a little pre-mature on this though. This is a risk as we are running out of time and need to see some positivity here soon.

Bearish indicators

  1. The index has spent the past month consolidating these falls. This is still a reasonable time frame, however it is beginning to take “too long”. The 200-day moving average must begin to bend up, which means the index needs to move up very soon;
  2. An alternative scenario is that the index continues sideways in a “muddle through scenario”. Neither falling much more, nor able to go up much more. This continues for months to years. The greatest danger to this scenario is that the index, or China as a proxy, is going backwards slowly; and,
  3. There is an outside possibility that the index still needs to spike briefly lower and rebound, say at 2,110.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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