Equity Market Bears, Take Careful Note of the Chinese Stock Market

It continues to amaze us how everyone is talking about a shift in economic influence to the east but few seem that interested in the behaviour of the stock market of the economic powerhouse of the world, i.e. China. Everyone seems obsessed by the behaviour of the S&P 500 and Russell 2000! Let us remind you – the Shanghai Composite led world equity markets out of the bear market late last year and we suspect that it will lead markets into the next bearish phase. So we think that punters should pay a little more than random attention to what is happening in the Chinese stock market.

Anyway, down to business! It appears that the Shanghai composite has let off sufficient steam and is now poised to make a new multi-week high, perhaps even before Christmas. What makes us confident that a multi-week high will be achieved? Take careful note of the two charts below especially the bottom chart! Chinese small caps made a multi-week high today. The primary bull trend in the Chinese stock market has been confirmed and we suspect in doing so the primary bull trend in world equity markets has also being reaffirmed!

Some may argue that the Chinese stock market is overheated and overvalued, perhaps you are right, who are we to argue with your beliefs, and equally who are we to argue with the behaviour of the two charts above!

Disclosure: Long EEM EWX

Comments

[socrateaz:]

Interesting how charts are interpreted by different people. My take is the top chart is very vulnerable to a steep drop soon. A small drop could cause an acceleration downward. If it moves upward I expect it will remain quite tame. The bottom chart remains quite unclear. I still suspect a toping of the chart soon. Neither chart would give me a bullish bias for more than a week or two. I would favor bearishness over the next few months with what I saw! Let us see what happens!

Nov 07 05:11 AM

[Freya:]

Socrateaz: Beauty is indeed in the Eye of the Beholder.

In the bottom graph, I would have intersected the top line with the September pop. Rising wedge and Breakout. Small correction. My kind of chart.

The Top graph, however, is also a thing of Beauty to me.

A much more pronounced Rising wedge. The Breakout here is in progress. My initial Target would be the Old high.

While interpreting the above charts Negatively, I notice that you do not present any short side Ideas.

I'm not going to wait to see what happens. I'm putting my money where my mouth is, Long EEM, EWX. Loose stops.

I believe in Investing.

Thank you, Tom

Nov 07 08:05 AM

[logicalthought:]

I would like to see the volume bars on this chart... If they're not increasing on each of those days, then I agree with socrateaz in that both charts (especially the first one) look awful "wedgy" to me (kind of like the most recent few days of the SPY, which has been going up on shrinking volume), and thus vulnerable to a large drop. More fundamentally, for folks who believe that "the Chinese consumer" can pull the world out of this mess (and I'm not one of them for at least the next several years, although eventually that might happen), why SHOULDN'T the Chinese market decouple from ours at some point?

Nov 07 08:08 AM

[tripleblack:]

I agree with freya's analysis of the charts - and with logical's point that China's markets need not be in lock step with America's.

I don't invest in China, for personal reasons having nothing to do with cerebral analysis, but keeping a close eye on developments there (as much as we can given the opacity of its government) is simple common sense.

Thanks for the charts and comments.

Nov 07 08:28 AM

[John Cordes:]

Well, Goldman, and UBS have just raised Chinese GDP estimates for both 2009 and 2010, (9.6% and 11.3%). It may be hard to understand a continuing building wedge if your context is dominated by the S & P and DOW where the US GDP finally found a positive quarter. The Chinese story is 1.3 billion people discovering the joys of consumerism and a government rotating it's managed economic goals from high export/cheap labor to domestic consumption. Combined with enormorous savings behavior, and a legitimate urban middle class larger than the entire population of the United States and you may begin to get what these charts are telling you.

Nov 07 08:35 AM

[H. T. Love:]

On Nov 07 08:05 AM Freya wrote:

><snip>
> The Top graph, however, is also a thing of Beauty to me.
>
> A much more pronounced Rising wedge. The Breakout here is in progress.
> My initial Target would be the Old high.

My only concern on that is the last candlestick is a "hanging man", although the "tail" is a little abbreviated. This is sometimes an early indicator that the bulls are losing control and downturn may be coming.

It's not certain, is usually more useful on intraday charts and should/would be confirmed in a period or two following the candlestick. Of course, being new at this stuff, I really don't know how reliable it is on these charts.

><snip>

HardToLove

Nov 07 08:57 AM

[Freya:]

ooops, my mistake...I was treating the chart not the interpretation of the Candlestick method.

Never got in on Candlestick Charting. I figured that since it hurt the Japanese so much that they couldn't see what was coming, I wouldn't pursue it either.

With that in Mind, I'll add FXI to the list of potential purchases.

Nov 07 09:54 AM

[tripleblack:]

A cautionary note, using analytical methodology which has a good application to American markets may not apply in the same manner to those operating in the Chinese environment.

Nov 07 09:59 AM

[User 55552:]

great stuff

Nov 07 01:20 PM

[Tom Santamaria:]

As a investor in bb small-cap Chinese stocks at the current time for only one reason. I like to buy the big revenue growers that are cheap.

The fundamentals support the charts above as the growth in China after a somewhat slower period while the rest of the World was mired in deep recession shows signs of finishing the year very strong.

How long this lasts depends somewhat on the future use of Chinas stimulous package and how the rest of the world recovers since export are still very important to China even though the increasing middle class is becoming a bigger part in supporting domestic growth.

Nov 08 07:04 AM

[Ricard:]

Whatever is inflating the US stock market (the Fed) is inflating the Chinese stock market as well. By adhering to their dollar peg, we will see similar patterns of over-valuation, except that in China's case, there is a good amount of growth to substantiate as well. This will probably lead to larger swings in performance relative to US markets, something that has been obvious in the past several years.

Nov 08 10:16 AM