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China was the First to Slide! – July 5, 2010

Happy fourth of July everyone! I hope you guys enjoyed your weekend. Me and my esteemed colleague had just presented to you the major indices in the US and how each of them portrayed a breakdown. We also showed you a look on one of the emerging markets in Asia, the Philippines, and how it appears to have decoupled from the major economies in the West. So to start the week, let's take a look on the daily time frame of the Shanghai Stock Exchange Composite Index ($SSEC), the 3rd largest stock market in the world by market capitalization at US$3.07 trillion as of May 2010. The SSEC is one of China's three stock exchanges, alongside the Hong Kong Stock Exchange and the Shenzhen Stock Exchange, that is in operation in China. The former, however, is not yet entirely open to foreign investors due to the tight money flow controls by the Chinese officials.

Looking at its daily chart, you can see that it had broken down from an ascending triangle back in mid-April only to break down again from a smaller descending triangle just last week. In my opinion, the index has still some room to cover south since its minimum downside target, which is computed by projecting the height of the symmetrical triangle from the point of breakout, just above 2,200 has not yet been met. The MACD is showing some bearish sign as well with its histogram recently turning negative. Though with the RSI in already in the extreme level, the index could move sideways for awhile or even rebound a bit before falling again. If it exceeds this target, the next obvious supports would be at 2,000 and at 1,800. With the index now trading below its 200 and 50 MA, it would need a great deal of buying interest to keep itself above water again.

As reported in our latest blogs, the US's major indices (DJIA, Nasdaq Composite, and S&P 500) have started to reverse and head south again. The Shanghai index, on the other hand, had already fallen 2 and a half months ahead of the US. How is this possible? Did not China just post a stellar 11.9% GDP growth during the first quarter of 2010? Did not China's export industry rise by a year-over-year gain of 50% the other month? If so then why would a lot of investors "lose confidence" by selling off Chinese equities in spite of the country's bullish economic data? Well, it is important to know the economic data such as the country's GDP, retail sales, etc. are mostly lagging indicators. Those "smart investors" may have already priced these upbeat results back then. The actual stage of the economy, which is yet to be reported in numbers to the public, though, is already exhibited in the index's price action. The index, as we are told, is a leading indicator of the respective country's economy. So if this is the case, then we are up for a downside surprise regarding China's economy. Hmmm. This then might be correct since last week's financial drought was started by the weak showing of China's leading indicator which only posted a 0.3% growth after printing a 1.7% rise the other month.

According to recent reports, China is already considering to unpeg its currency, the Yuan, from the US dollar. For a long time, China has pegged the Yuan against the USD, making its exports cheaper as a result. By moving the country's currency policy to a more market oriented one, China's exports sector, which saw recently saw a whopping 50% jump, would surely take a hit. And since the country is at present highly dependent on its exports, it economy would likewise hit a bump. Is this scenario already 'priced in' by the market? Would the Chinese economy dip some more? Quite possibly.

If so, then the rest of the world instead of being pushed up could be pulled down if China's economy dips further unless of course a decoupling among the economies in the world occurs. As of now, it seems that the emerging markets in Asia have their own lives but if the condition in China, US, and Europe worsens, expect the emerging markets to get shocked as well. How hard will the impact be? We have yet to see it. In any case, better be on the guard!

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Disclosure: No positions