Diary of a Financier

China: Shanghai Beginning a Bottoming Process

In Capital Markets on Thu 9 Aug 2012 at 18:08

China’s Shanghai Index (SHGIDX) has fallen another 5.7% since my last comments on the Chinese equity markets. Now that a few months have passed, I thought I’d update my outlook, because I see the start to a bottoming process.

Picking-up where I left-off, recall that I expected the Shanghai to continue corkscrewing lower into the vertex of a falling wedge. That being said, I noted the fundamental value I was starting to see on a company-specific and economy-wide bases. This is all part of the bottoming process for a market that’s down almost 40% from its 2009 high and -34% since 2010’s breakout high. In fact, SHGIDX has been one of the worst performing major asset classes in the world since the crisis began in 2007, and it’s only outperformed the PIIGS indices.

Of course, the continued slide lower has ushered SHGIDX closer to its trendline support–now a hiccup away. That’s not what has me watching for the bottom though. It’s the bullish divergence between technical indicators and the pricetrend that portends a reversal:

SHGIDX daily- falling wedge is winding into its vertex with bull divergence developing in the start of a bottoming process.

A similar development has materialized in the weekly fractal, where bull divergence again catches my eye:

SHGIDX daily/weekly/monthly- daily fractal shows the beginning of a bull reversal, while the weekly has already confirmed bull divergence; a bearish monthly awaits cues from shorter-term charts.

This is only the beginning of a bottoming process. It may fail, and it should take weeks or months to develop. With SHGIDX’s daily stochastic nearing the top of its range, I won’t be chasing this thesis quite yet. I want to witness follow-through in the bull divergence first–namely MACD holding its trendline support. If this happens, the weekly fractal’s indicators will almost simultaneously confirm the bullish signals, at which time I may start a position in the China ETF (FXI) and start assessing some singlenames.

It’s also important to note the reversal that occurred in China’s neighboring Hong Kong, where the Hang Seng Index (HSI) is up 12.25% from its June 4 low and almost 10% ytd. As a special region of China, Hong Kong is an important barometer for regional economic activity. Further, a number of HSI components are actually Chinese companies that trade on the Hong Kong Stock Exchange, so it offers a relevant harbinger.

–Romeo

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  1. […] Wednesday afternoon, I finally started to act on my observations that the Shanghai Index (SHGIDX) has begun its bottoming process. When I noticed the China […]

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