August 31, 2009
Even bears need a stimulant to get their act going. It wasn’t a disastrous day but it wasn’t a good way to end the month given the sour China note. The new maxim may be: “when China catches a cold the rest of the world gets the flu.” Of course this would be a substitution for what used to begin “the US.” It may also be true to say we just all have the flu, H1N1 or whatever.
My first business trip to China in the mid-1980s allowed me to witness ordinary citizens trading stocks on the street corner in front of the recently opened stock exchange. It was fun to watch and, if you’re a student of history, you’ll realize that’s the way things were done in London and the US more than a century ago.
More profound is the worry of what a new bear market in Shanghai portends for markets where shockwaves are felt hardest—commodity, currency and emerging markets —which were all hit hard today.
Without posting it until the end of the commentary as usual, let’s look at the Shanghai CSI 300 Index right away. It’s the most popular of all the Chinese indexes. It’s important to remember that the constituents may have little to do with popular FXI (FTSE Xinhua 25 Index ETF) but certainly the index has a psychological impact.
First the daily view with my annotations that include an RSI (Relative Strength Index), two moving averages, candlesticks (for visual effect) and DeMark Indicators. In the blue circles you’ll see two occasions where the RSI recently has slipped below 30 indicating severely oversold conditions. Also, note DeMark counts reaching 9 sequential readings heralding some trend exhaustion both on the upside and downside. I’ve also drawn two orange support lines where I think we could find support to work off the oversold RSI but it won’t take much in that regard.
click to enlarge
Next is the weekly view and you’ll see some similarities with DeMark counts and, importantly, exactly the same support levels. This is interesting and not seen that often.
To sum up, the CSI 300 is much oversold short-term but in a bear market with serious support, more than 10% below current levels.
Meanwhile, back in NYC nobody liked the news from China and sold most markets off sharply especially those related to Chinese material demands and conditions. Volume was pretty average, meaning light, for the day. While breadth was decidedly negative.
The McClellan Summation Index is much overbought but starting to roll over.
I promised we’d look at monthly charts today and that’s what we’ll do. That will give us some perspective.
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