All Eyes On The Chinese Stock Market

After almost doubling since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index (3,046) has now declined by 12.2% since its peak of August 4.

This morning the Index dropped to below its 50-day moving average (3,097), but is still comfortably trading above its 200-day line (2,413). The Rate-of-Change Indicator (black line in the bottom section of the chart) is also about to break below the zero line, thereby flashing a sell signal.

Source: StockCharts

David Fuller (Fullermoney) said: “Some commentators think China has already entered a climactic third upward stage characterised by mania. Yes, last month’s gains were a bit frothy, causing the uptrend to steepen. However, this has boiled over … Some of the speculative froth is now being blown away, but I suspect we are seeing no more than the first reversion to the mean within this bull market. China should have world-leading increases in corporate profits next year.”

Technically, it looks if more downside is in store for the Shanghai Composite Index and it would not come as a surprise if lower Chinese equities serve as the catalyst for a well-deserved pullback in global stock markets. I will be watching this space closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend.

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