Chinese Market Correction Not Surprising

The benchmark Shanghai Composite Index (SCI) is continuing to correct. The barometer of Chinese market performance, with about 872 listed stocks, broke below technical support at a previous lower pivot point of 5,025 and declined to the 4,900 level, before a rebound on Wednesday back above this pivot point.

The SCI has corrected about 19.75% since trading at a record high of 6,124.04 on October 16. The selling points to a trend reversal on the chart. The index could continue to trend lower, but watch for the oversold condition that is evident and could give stocks buying support in the upcoming sessions.

In spite of the correction, the index is still up 136% from its 52- week low of 2,084. The selling should not have been a surprise to you, as I have constantly suggested that Chinese-listed stocks were overextended, bubble-like, and extremely vulnerable to market shocks and selling. Our past experiences in the U.S. markets, such as in 1987 and 2000, should have been a lesson for traders that markets that accelerate too rapidly are generally not sustainable.

On a technical basis, the chart of the Shanghai Composite Index continues to be bearish. The price trend for the SCI continues to trend lower following the two successive attempts to hold above 6,000 failed. A bearish double top is evident on the chart, with neckline support at around 5,600. The Relative Strength Index (RSI) is extremely weak and the MACD continues to show a sell signal. A near-term trend reversal has occurred after the 19% correction.

The index remains below its 50-day and 20-day moving averages at 5,479 and 5,138, respectively. The SCI has also broken below the lower Bollinger Band support and below a lower pivot point at 5,032.

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.

My advice would be to remain prudent trading in Chinese stocks, whether on North American exchanges or on the Hong Kong exchange.