In the analysis I presented in the previous blog I had said that there were a number of issues that seemingly weighed down positive sentiment in China and one of those being the lack of the appropriate policy to prevent a hard landing. I also stated that the transitory nature of government's policy in relation to transforming the economy from purely manufacturing to a consumer driven one was hurting the future outlook.
There's no need for me to go into further detail but if you missed out on last week's blog you can catch up with what I had to say by following the link.
Monthly
Although the index has been in function much longer than its newer counterpart, the CSI 300, we do see similarities in that the price exhibits stages where it suddenly spikes higher into new territory and subsequently collapses. I've drawn a dome figure over the previous spike to show this and if you look carefully you'll see the same thing has occurred with the latest spike however we have yet to see the full resolution to the downside which we could assume is halfway through progression.
It's difficult to identify any distinguishable trend after such spikes and given that China has only started the process of liberalising their financial markets, not without a few hiccups along the way, it suggests that more progress is needed in terms of transparency Chinese regulators offer market participants. If the situation remains as it is now there is a risk that the same outcome takes place as had done with the previous spike.
Drawing closer to the present we see that a neatly formed inverted cup and handle formation has evolved which seems to be the only clear technical pattern that has formed over the time series. These pattern occur when put through various bouts of volatility. Again the suggestion here is an increased level of interest is being focused on the index highlighting its ascendency.
The difference we see in this chart compared to that of the CSI 300 is although both show the same pattern namely the inverted cup and handle, the Shanghai Composite demonstrates a cleaner break of support to confirm the patterns validity. The target would be the lows last seen in 2009, a level that's concurrent with the CSI 300.
Weekly
Zooming into the weekly we see a clearer picture with two identical technical patterns formed but with different scales of declines speculated. We recognize the inverted cup and handle formation we saw on the monthly however this can be broken up into two segments with one representing a minor and the larger one the prominent formation.
Support that gave way on the minor sat at 3600 however take note how the price fell below the 50 SMA and failed to secure it once the dropped occurred. The support on 3600 then became resistance as the price struggled to take control of those levels again forming the underlying basis from where the bears could take full control.
Once enough time had passed and the energy needed to break higher having dissipated it was the bears turn to inflict major damage where it mattered most which is evident by the long ranged red candles that resulted in the level of 3000 being broken decisively. The confluential impact of the 200 SMA and the neckline of the major cup and handle provided weak support for the buyers and we witnessed the price sliding easily through the cracks.
With price now sitting below both key moving averages sentiment has turned the tide with the level of 2500 representing the completion of the minor. The biggest concern at the moment is the fact that the major has just broken past support recently so the move is yet to reach it's full potential which sits at 1750.
The alignment from both indices as to the amount of decline is still expected to come from the Chinese stock market does add further evidence that the worst may yet to be over. The situation may be glazed over for the time being as the market contemplates the impact of negative interest rates but will accelerate into the forefront again when things get out of hand.
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