Don’t Let the Chinese Euphoria Blind You

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.