Chinese Stocks Hit a Rough Patch

Tuesday was a bad day for Chinese stocks listed on the benchmark Shanghai Composite Index (SCI), as the index collapsed by nearly eight percent to 3,072, and may take a run at support at 3,000. Surging oil prices and continued concerns regarding a U.S. slowdown impacting demand for Chinese-made goods are some of the factors driving the selling in China.

The SCI continues to be on a downward trend that has yet to show any base forming, so there could be more downside moves to below 3,000 in the upcoming sessions. In April, the SCI showed a bullish “V” shape formation on the chart, but the rally was not sustainable, as the trend turned back down. The SCI continues to trade with more volatility compared to the major U.S. indices, such as the DOW, NASDAQ and S&P 500. The SCI is presently down about 50% from its high of 6,124 and down 38% from its close of 5,261 in 2007, much worse than the six-percent declines in the DOW and S&P 500. The larger decline in the SCI versus the U.S. indices should not be a surprise given the higher risk-to-reward on the SCI. For investors, the key was to take some profits when the SCI was surging in 2007 compared to U.S. markets.

With the SCI remaining below the key moving averages, a major correction and trend reversal has occurred. For traders and investors, there now needs to be a base to form for the selling overhang to occur, followed by buyers re-entering the market.

The Relative Strength Index (RSI) for the SCI is declining and is weak, while the MACD is also flashing a sell signal on the chart. Watch for lower support at around 3,000 and a pivot point at 2,990. A decline below this could signal more weakness if oversold buying fails to surface.

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At this point, it is difficult to discern if the selling is over in China. In the near term, you should hold on and wait to see if lower support levels hold. At the end of the day, the key is accumulating positions in good Chinese companies on selling weakness and holding for the market to strengthen.