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Is China a leading indicator? Part 3
Today as I looked at my list of world stock market indices, every major market index in US, Europe and Asia was up, except one – the Shanghai Composite. At the time of writing of this blog post, it was in the red by 0.59%. I guess China did not get memo about the Santa Claus rally which typically happens at year end as fund managers bid the markets up so they can close the year off with good numbers. I decided to take a closer look at the charts for the Shanghai composite index which I have not talked about in this blog since Sept 29. Below is the daily $SSEC price chart. The Shanghai market has managed to recover quite a bit since the last market correction which started on 4 Aug 2009. However, the recovery rally appears to have run out of steam since late Nov 09. Prices have only managed a series of lower highs since then and last Friday prices broke below the uptrend line of the recovery rally. Based on the short term price chart, the market action does not look very bullish at all, especially if prices break below the previous low of 3096 on Nov 27.
As short term chart patterns are generally not as reliable, I decided to look at the weekly chart (see below) as well. Based on the weekly chart, the uptrend line of the rally which started on Nov 2008 is still intact. The weakness in recent weeks can still be interpreted as a pullback but prices need to rebound very soon to keep this rally going. To me it looks like the Shanghai composite is at a “make or break” point. Prices have already made a “lower high” i.e. The Nov 09 high is lower than the Aug 09 high and in a way, this looks very similar to the price action from Oct 07 to Jan 08 on the left side of the chart.
If the short term charts are correct, it looks like the next move will most likely be down but we really should watch the longer term charts for confirmation. A possible fundamental reason for the weakness in the Chinese stock market could be the strength of the US dollar. China has pegged the Yuan to the USD and when the USD was weak, Chinese goods managed to remain cheap when exported to the US and other countries. In recent months, the Chinese currency manipulation has given China an advantage over other exporters in Asia whose currencies appreciated against the USD. Now that the USD is strengthening, China will be disadvantaged if their currency remains pegged to the USD.
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[...] stock market is closed this whole week because of Chinese New Year. The last time I looked at the chart of the Shanghai Composite index in December 2009, it was on the brink of breaking a 13 month uptrend line which started in November 2008. Since then [...]