Up to now, Chinese stocks have looked invincible, as the benchmark Shanghai Composite Index (SCI) has been on an upward trajectory with only a minor nine-percent correction in late February. The SCI touched another record high of 6,124.04 on October 16 and was up a staggering 233% from its 52-week low of 1,841.82, but the market in my view has been way overextended, bubble-like, and extremely vulnerable to market shocks and selling. I have been saying this for some time, yet the SCI continues to run higher.
But now with the concerns in the U.S., it has translated into selling across the Pacific as the SCI is in correction mode, down over 13% to the current 5,293 level as of November 20, after trading at the record high. The scope of the selling represents a minor correction. The concern is the potential of further weakness that could drive a trend reversal in the SCI, which we will discuss in my technical commentary.
A look at the chart of the Shanghai Composite Index shows a bearish picture. The near-term price trend for the SCI is down after two successive attempts to hold above 6,000 failed. For technicians, it clearly appears that a bearish double top had materialized with the neckline support at around 5,600. The subsequent break below 5,600 is considered bearish. Moreover, the Relative Strength Index (RSI) is also trending lower while the MACD is displaying a sell signal and trending lower. A near-term trend reversal may be in the works if the index continues to flounder.
The index broke below its 50-day and 20-day moving averages at 5,535 and 5,776, respectively. The SCI has also broken below the lower Bollinger Band support and could head lower towards the lower pivot point at 5,025.
In all, the near-term technical picture for the SCI is negative at this time, but given the selling, the index could see some oversold buying emerge in the upcoming sessions. At the end of the day, do not risk your capital until a base is formed.
Don’t Let the Chinese Euphoria Blind You was last modified: January 31st, 2012 by George Leong, B.Comm.
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 31, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 31, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)