The four days of trading are followed by another five days of holiday and then a single trading day before the weekend break starting Oct 9. The market does not return to extended normal trading until the week starting Oct 11. Holidays always counsel caution.

 

Throw into this mix the ongoing tension between China and Japan and the ramping up of rhetoric against the renminbi and there is potential for some wild swings. The 79th anniversary of events in Shenyang on Sept 18 underscored deep memories of the Japanese invasion of China in 1931. Shenyang was the first landing point and is now a booming second-tier city. It provides a background to the developing current- day tensions over the contested Diaoyu Islands and their potentially large gas reserves.

 

Mid-term US elections provide a great excuse for China-bashing and complaints about the renminbi amid the rapid collapse of the US dollar Index. A change in the renminbi’s value would do little to help stabilise the US economy. “It’s not going to have much of a dent in the US deficit,” says Nobel laureate in economics Robert Mundell. “The US has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate.”

 

The projected changes would make it more difficult for US companies to export to China, and leave them further behind export competitors. Germany, Japan and other nations are exporting more goods to China. The US exported only US$69.5 billion ($91 billion) worth of goods to China last year, well behind Japan’s US$109.7 billion. German exports to China increased 7% y-o-y to US$49.4 billion.

 

Truth rarely gets in the way of politics. The political environment is changing and this always affects markets, but perhaps more so in China, where there is a popular perception that government policy is a major player in market behaviour. The result is four days of trading with a nervous overtone. This is a market that could move rapidly in any direction, depending on the impetus provided by external events. It’s no surprise that it continues as a range-bound market.

 

The Shanghai Index market fall on Sept 16 is significant as it is the first break below the up-sloping trend line. The sharp fall below the up-sloping trend line is an end-of-trend signal. It is not a signal for the beginning of a new downtrend.

 

Failure of support near 2,580 confirms the development of a strong downtrend and the potential to retest previous lows. Support failure at 2,580 is bearish and the market can quickly fall to support near 2,480 and develop a longer-term W-shaped recovery.

 

A rebound from support has developed and it is testing temporary resistance near 2,640. This suggests that the market will remain locked in a sideways trend rather than begin a new plunge, thus developing a range-bound trading environment. This is not a trending market and this makes it vulnerable to external shocks.

 

A consolidation band creates a foundation for trend behaviour. Traders look for trend break signals at the upper and lower edges of the trading range. These are at 2,580 and 2,680.

 

The key feature with the recommencement of trading on Oct 8 is any change in the Guppy multiple moving average relationships. The short-term GMMA, which shows trader activity, has dipped below the long-term GMMA for the first time in several months. It’s usually a bearish signal. A continuation of the rally will carry the short-term group higher, creating the potential for a temporary dip.

 

In a trendless market, the short term GMMA will oscillate around the long-term GMMA in sharp rally-andretreat behaviours. Traders adjust the analysis of the GMMA and wait until clear trending develops.  (See Chart)