Concerns remain for Shanghai stability

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I remain more concerned for the Shanghai stock market than any other in the world at this stage.

I have been writing of my concern for the China market, as represented by the Shanghai Index, since March. This concern has continued. However, today, despite a significant fall of 1.7% on Friday’s trading, I remain more positive than I had been in past reports.

This is not to say I’m bullish, rather the market seems to be stabilising and hence, this is good news.

We need to remember that what happens in China is most likely to happen to us here in Australia and the rest of the world. The only economy that can track somewhat independent of China is the US. Unfortunately, Australia is just a passenger on the train of these super economic powers.

The chart below shows that China is at 2,066, down 23% from a year ago.

In this report, I have been able to reset a key level of 2,031, only 1.7% lower, marked by the little ‘s’ just below current levels. I’m hopeful that at around this level, that market will oscillate or find a bottom. So hopefully not much more to fall.

In my list of Positives and Negatives, for the first time, I’m placing the Positives on top of the list, albeit that there are eight positives and eight negatives. Indicating the market is balanced and at least not falling further.

It remains important that new key levels identified – namely 2,031, then 1,962 (5.3% lower) – are to hold in the days and weeks to come.

If these levels do not hold, then it is possible (although remote) the feared level of 1,812 (14% lower) comes into focus.

I remain vigilant, watching this index on the expectation that this is how the globe will muddle through the impacts of the global financial crisis.

Positives

1) The 200-day moving average is still pointing down.

2) 2,049 as a minor level, is revised to 2,031. This level is now key. The market is working hard to stabilise and not fall below this level.

3) For now, the lows on 5 September (2,029) and 26 September (1,999 or 2,000) are constructive of a low being near or around there despite making new lows.

4) The level of 2,031, or thereabouts, is foreseeable as a positive turning point.

5) The following Positives still remain relevant:

  • The level of 2,100 is a round number support, with significance that dates back to 9 December 2008. The fact I’m talking about this turns it into a negative.
  • The index has fallen to the 2,100 level twice now, and bounced off it. On 31 July and last Friday on 17 August.
  • Patience is required. The full downside risk of 1,812 while there seems on balance unlikely.

Negatives

1) The important 2,099 level has been broken, explaining the 1.7% fall to 2,066 on Friday.

2) The 2,134 level remains important and the market is now below this level. This level was rejected two times on 7 September and 18 October. It remains that we need to get above this level to see markets confirm stabilisation.

3) The next level lower is 1,962, or 5.3% lower if the 2,031/2,000 lows do not hold. This is a minor level only and a meaningful level to bounce off is hard to determine.

4) The ‘ugly’ scenario of 1,812 or 14% lower has come on the radar as a possibility, albeit remote and surprising at this stage.

5) I have called for a bounce that is taking longer than expected.

6) The following negatives remain relevant.

  • It has broken the 2,172 level of 6 March 2009 when the US S&P 500 index was at an all-time low.
  • The 2,100 resistance level was rejected on 9 December 2008 and then the Index fell back to 1,814, or 13.6% lower. This was back in the “bad old days” of the GFC volatility.

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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