Thursday, June 09, 2011

A Classic Technical Signal: China Breaks Down

China's stock market has broken a long-term flag to the downside. Look out below.

Since "the China Story" is the foundation of global growth, demand for commodities and ultimately, stock market profits, when China's stock market breaks down it behooves us to pay attention. Technical analysis offers a number of tools to help us chart the past and present and calibrate probablities of what might happen in the future.

Much of the time there are no clear signals, and chartists can lose their way trying to discern patterns and trends which may or may not pan out in the future.

In other cases, the technical tools provide very clear signals which investors choose to ignore at their own risk. These include "death crosses" (a short-term moving average dropping through a longer-term moving average) and price sinking below moving averages.

One classic pattern is a flag or pennant (a.k.a. a wedge). The psychology behind the pennant is rather transparent. Lower highs reflect a decline in Bullish enthusiasm and buying pressure, as every "buy the dip" fails to match the previous dip-buying.

The Bullish "story" that powers the "buy the dip" buying has rendered Bearish sellers wary, so each decline is shallower than the last. The tug of war between Bulls (buyers) and Bears (sellers) has reached a stalemate.

Whichever way the market breaks from this price/volatility compression sets the new trend's direction.

The direction of China's market has been decisively signalled: breakdown. In technical analysis, it doesn't get any better than this:

In the typical course of things, price may well rise in another "buy the dip" phase, but it will meet strong resistance at the lower trend line. Price may well noodle around for a while beneath this new resistance before cascading to previous lows.

Since the Shanghai market tends to lead the U.S. and other global markets, a breakdown in China's market can be seen as a predictor of what lies ahead in the U.S. and other global stock markets.

The wheels are falling off the China story. A massive wave of malinvestment since 2008 is cresting, and the stupendous stimulus provided by gargantuan local government and private lending is expiring.

That's what the chart is telling us if we "read between the lines."

Readers forum:

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

Thank you, Barry B. ($10/mo), for your supremely generous subscription to this site -- I am greatly honored by your support and readership. Thank you, Alexander G. ($5/mo), for your most excellently generous subscription to this site-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)
If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted
on my site.

  © Blogger templates Newspaper III by 2008

Back to TOP