Chinese Stocks Plunge: Precursor for Global Markets?

by: Prieur du Plessis

Goldman jitters and the pledge of China’s central bank to immediately implement new lending rules to curtail property speculation have resulted in the Chinese Shanghai Composite Index plunging by a massive 4.8% this morning.

After today’s sharp sell-off, the Index (2,980 at the time of writing) is the only major bourse trading below both its 50-day (3,055) and 200-day moving average (3,096). It is now of critical importance that the February low of 2,935 – a mere 45 points away – must hold in order for the cyclical bull market to remain intact.

Click to enlarge:

Source: StockCharts.com

The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009 – and is being watched closely to ascertain whether this market would be the first to spell danger for global stocks, i.e. the proverbial canary in the coalmine. Given the overbought, overbullish and overvalued condition of most stock markets, be extremely cautious out there.