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

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 |  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.

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Source: StockCharts.com

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.

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