Shanghai Market Breaks 200 DMA: Buying Opportunity or Trend Indicator?

Includes: FXI, FXP, IFXAF
by: Prieur du Plessis

The Chinese Shanghai Composite Index - the index that led the turnaround in global stock markets by five months - seems to be in trouble. The Index has just become the first major index to breach its key 200-day moving average, often seen as an indicator of the primary trend. In order to guard against whipsawing one would have to wait a few days for the break to be confirmed.



Whether this cycle will be characterized by China having led both bottom and top turning points will become clear in due course, but a study of previous declines in the Shanghai Index makes for interesting reading.

According to US Global Investors - Weekly Investor Alert, in early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing (see charts below). This would seem to suggest that the stock market correction in China could present buying opportunities in the medium term.


Source: US Global Investors - Weekly Investor Alert, January 29, 2010.