Shanghai Composite Index - Technical Analysis

Accuracy score :

China's economy has started to slow, the Chinese yuan is falling, and China's stock markets are convulsing. According to analysts, the Chinese government will have to make a most difficult decision in 2019 to keep growth near its 6.5% target. China’s GDP grew 6.5% from the same quarter a year earlier, down slightly from 6.7% growth in the previous quarter and off analysts' expectations of a 6.6% growth. The pace was China’s worst since the first quarter of 2009 but investors were apparently heartened by statements from Chinese banking regulators to remain calm. The escalating trade wars also have a negative influence on China, the U.S. slapped tariffs of 10 percent on $200 billion in Chinese goods, and China retaliated by putting tariffs on $60 billion in U.S. goods. China is likely to take a bigger hit to its economy than the U.S. from the escalating trade wars, the effect on the U.S. economy is still small, but it would become greater if the trade wars are prolonged and begin to hurt confidence. Economists say China's growth could be slowed next year by as much as 0.6 percent due to tariffs.

Chinese Vice Premier Liu said recently that China attaches importance to the health of its stock market, and said U.S.-China trade clashes were affecting sentiment. He concluded that the psychological impact is bigger than the actual impact, and this is true. The major financial regulators also announced that recent “abnormal fluctuations” in Chinese stock markets don’t reflect the country’s economic fundamentals and “stable financial system.

Technical analysis

China’s main equity benchmark on Friday produced its best daily gains since early August to end another rough week on a high note. The Shanghai Composite INDEX  gained 2.6% to mark its best one-session rise since Aug. 7 but it is important to say that for the week, however, the Shanghai index marked its second straight weekly drop, falling 2.2%. At its current pace, the Shanghai is tracking its worst month, down 9.6%, since January of 2016 when it fell 23%.

When we look at the 1-year chart we see that Shanghai Composite Index is moving in "downtrend". As long Shanghai Composite Index is below this trend line and 3,000 points this index is in the "SELL" zone. Short term support and resistance levels are 2,400 and 2,800 points - If the Shanghai Composite Index jumps above 2,800 points that would be a "BUY" signal and the open way to 3,000 points. If Shanghai Composite Index falls below 2,400 and after 2,250 points it would be a "SELL" signal and then we have an open way to 2,000 level strong support. From the perspective of economic fundamentals, the Chinese stock market is not expensive but as long the Shanghai Composite Index is below 3,000 points there is no possibility to change the dominant trend of the current"bear" market. If the Shanghai Composite Index jumps above 3,000 points that will be a strong signal of the trend reversal and the open way to 3,500 points. On the other side, If the Shanghai Composite Index falls below 2,000 points that will be a strong signal "SELL" signal.