Wait for Chinese Stocks to Settle

So far, 2008 has not been kind to Chinese-listed stocks on the benchmark Shanghai Composite Index (SCI), as the negative bias and downward selling pressure have remained intact. Since trading at a 52-week high of 6,124 in late October 2007, the SCI has been on a steady downtrend, declining to 3,348 on April 15, down 45%, including an 18% decline in the first quarter. With the SCI below key moving averages, a major correction and trend reversal have occurred. For traders and investors, we now need a base to form for the selling overhang to occur and then for buyers to re-enter the market.

For those who have followed my commentaries, the correction should not be a surprise due to the bubble-like conditions that have been in place after trading at over 6,000. The gains were not sustainable given the rising inflation and interest rates in China. In addition, much of the buying was due to speculators with little understanding of the stock markets.

I believe the selling is not yet over, and that it could result in additional losses down the road, as the market deals with the slew of market risk, including surging oil prices. Given that China is a major user of energy, the high prices could impact growth in the country as well as the profits of Chinese companies. The International Monetary Fund (IMF) recently suggested that the global credit crisis continues to be a threat to economic growth.

The chart of the Shanghai Composite Index continues to show the index in a downtrend. In technical terms, the large correction marks a major trend reversal on the chart, so we are now more concerned going forward.

The near-term price trend for the SCI remains negative, with trading below the 20-day, 50-day, and 200-day moving averages, which represents a bearish picture.

The Relative Strength Index (RSI) is weak at below neutral, while the MACD is also flashing a moderate sell signal on the chart and is in a downtrend.

My advice is to wait for the stocks to settle in a base with new buying support before jumping in.