All eyes on Chinese equities

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After almost doubling since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index (3,046) has now declined by 12.2% since its peak of August 4. This morning the Index dropped to below its 50-day moving average (3,097), but is still comfortably trading above its 200-day line (2,413). The Rate-of-Change Indicator (black line in the bottom section of the chart) is also about to break below the zero line, thereby flashing a sell signal.

14-aug-09-1

Source: StockCharts.com

David Fuller (Fullermoney) said: “Some commentators think China has already entered a climactic third upward stage characterised by mania. Yes, last month’s gains were a bit frothy, causing the uptrend to steepen. However, this has boiled over … Some of the speculative froth is now being blown away, but I suspect we are seeing no more than the first reversion to the mean within this bull market. China should have world-leading increases in corporate profits next year.”

Technically, it looks if more downside is in store for the Shanghai Composite Index and it would not come as a surprise if lower Chinese equities serve as the catalyst for a well-deserved pullback in global stock markets. I will be watching this space closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend.

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