Since my update last weekend, China's stock market has continued to recoup some of its losses after plunging by more than a third since its mid-June peak. China's government went "all out" to stave off an even worse crash with measures including an interest rate cut, stopping all IPOs, less-strict margin requirements, threatening to arrest short sellers, and letting speculators use their houses as collateral for margin loans. With all of the measures taken to shore up the market, last week's bounce has been underwhelming, but unsurprising considering the sheer amount of selling pressure that has been created by speculators who are eager to protect themselves as the bubble collapses under its own weight.
Is China's market out of the woods? I'm not so convinced just yet. It is important to realize that bubbles deflate in waves, with many sharp "dead cat bounces" that give way to even further bearish action. For this reason, I'm analyzing the technical situation very closely as it unfolds. After breaking below its uptrend line, China’s benchmark Shanghai Composite Index bottomed recently at the 3,400 support level (the January high) and has since rallied back to the 4,000 to 4,100 resistance zone. A break back above this resistance zone and trendline would increase the probability of further bullish action, while a failure to break above this level combined with a break below the 3,400 support level would likely signal further declines ahead.
Source: Stockcharts.com
The Dow Jones Shenzhen Index fell under its uptrend line and 600 to 660 support zone, but recently bounced off of its longer-term uptrend line. On Friday, the index closed above the 600 resistance level, which is a good start, but a close above 660 would provide even better confirmation of the rebound. If the index fails to close above this resistance zone, however, it may fall back down to re-test its longer-term uptrend line.
Source: Stockcharts.com
The U.S.-traded DB China A-Shares ETF plunged under both its uptrend line and $45 level that are now resistance levels that the ETF needs to rise above to improve its technical situation.
Source: Stockcharts.com
The U.S.-traded iShares FTSE China 25 Index Fund (FXI) fell briefly under its uptrend line, but has since risen above it and is under its $44 resistance level that needs to be cleared to signal further gains ahead.
Source: Stockcharts.com
A heavily-manipulated stock market like China's tends to defy predictions, which is why all forms of analysis need to be taken with a grain of salt. While I refuse to make short-term predictions about China's market, I am comfortable going on record warning that China's economy and financial markets are experiencing unsustainable, debt-fueled bubbles that will end disastrously like Japan's economy did in the late-1980s. The specific path China takes en route to that crisis, however, depends on the actions taken by their policy makers, which is inherently unpredictable.
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(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)
