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Blue dots or red spots?

Daryl Guppy
Daryl Guppy12/13/2019 06:30 AM GMT+08  • 6 min read
Blue dots or red spots?
(Dec 13): In the sidelines of the Regional Comprehensive Economic Partnership conference in Bangkok, US Commerce Secretary Wilbur Ross announced the US-led Blue Dot Network. He was flanked by enthusiastic supporters, Japan and Australia, who are officiall
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(Dec 13): In the sidelines of the Regional Comprehensive Economic Partnership conference in Bangkok, US Commerce Secretary Wilbur Ross announced the US-led Blue Dot Network. He was flanked by enthusiastic supporters, Japan and Australia, who are officially described as “spearheading” the initiative.

The official release refers to the Blue Dot Network as “a multi-stakeholder initiative to bring together governments, the private sector and civil society to promote high-quality, trusted standards for global infrastructure development”.

The network is essentially expected to serve as a globally recognised evaluation and certification system for roads, ports and bridges, with a focus on the Indo-Pacific region. It will give a “seal of approval”, according to the US State Department. The clear slur is that Belt and Road projects lack trusted standards, but the intent is to develop unilateral standards.

Does this change the investment environment in Asia? This is the key question for investors. Initial evaluation suggests probably not.

Some projects will be Blue Dots and not much different from projects supported by the Asia Development Bank (ADB) headquartered in Manila and dominated by the US and Japan. It is not much different from projects supported by the Asian Infrastructure Investment Bank created by China, and run along internationally rigorous funding lines that have poverty alleviation and climate compatibility as its core criteria.

The Blue Dot Network is a welcome addition to filling the annual US$1.7 trillion ($2.3 trillion) Asian infrastructure gap as estimated by the 2017 ADB report. It is a pity that it is not a cooperative venture that works with other funding sources.

If investors let their analysis rest at the level of infrastructure development, then they miss the multiple other investment opportunities that come from the Belt and Road Initiative — the Red Spots. The BRI is a much more comprehensive programme that includes the structure of trade, cross-border transactions and soft infrastructure within the region. BRI delivers opportunities in artificial intelligence (AI), 5G, smart cities and potentially a blockchain-based national digital currency.

Putting aside infrastructure, the BRI programme has three areas of development, each with its own investment opportunities.

The first is trade infrastructure. This includes the regulatory environment, payment systems and protocols and the application of blockchain certification to everything from logistics chains to digital currencies.

The second is soft infrastructure, which includes trade settlement and banking outside of the dollar-based system. It includes blockchain, 5G and AI development standards, as well as construction standards that will impact project bidders.

The third is capital infrastructure investment. The opening of Chinese capital, bond and derivative markets is part of this. It includes changes to investment and foreign investment regulations that deliver business growth opportunities.

Asia’s engagement with BRI is more pervasive than the limited engagement offered by the Blue Dot network. The Red Spots offer a path to the future of innovation. The Blue Dots are more of the same — necessary but not profoundly different.

Technical outlook for the Shanghai market

The Shanghai Index has developed a steady rally from the low near 2,860. The rally is testing two resistance features. The first resistance feature is the long-term support and resistance level near 2,920. The second is the value of the upper edge of the long-term Guppy Multiple Moving Average (GMMA). This value is also near 2,920.

It is too soon to know if this rally has the strength to develop into a new uptrend, or if it will collapse and show a continuation of the downtrend. However, we can set the conditions that will indicate which outcome is successful and the potential index targets.

The GMMA is used to assess the strength of the trend. The long-term GMMA is showing steady separation and is still moving down. This is bearish. It acts as a resistance feature that slows any rally rebound. The upper edge of the long-term GMMA is near the value of the central support resistance level near 2,920, so this creates two uptrend breakout resistance features.

This increases the probability of a rally retreat. However, if the index is successful in breaking out above these two resistance features, then the next upside target is near 2,960. This is the resistance level defined by the value of the downtrend line. A breakout above these two resistance features can move very quickly to test the strength of resistance offered by the downtrend line. A useful breakout has the potential to develop into a new uptrend.

A bearish outcome is when the two resistance features are so strong that they create a rally retreat. In this situation, the index would move down to retest the lows near 2,860 and the long-term support level near 2,830.

The short-term GMMA indicates the way traders are thinking. This group is also steadily and consistently separated. There is no evidence of compression, so this suggests steady selling. Traders are waiting for the test of support near 2,830 before they enter the market in anticipation of a trend change. This steady separation suggests any rally will be short-lived.

The separation between the two groups of averages is also consistent. This consistent separation is the characteristic of a steady and well-established trend. The key future event is the strength of the support behaviour when the index reaches 2,830.

The combination of the downtrend line and the horizontal support level near 2,920 creates a down-sloping triangle pattern. This is a strong pattern when it appears in a downtrend, so investors are alert for any pullback activity. A downside target is calculated by measuring the height of the base of the triangle and projecting this value downwards.

The 2,800 target level is below the value of the lower edge of the long-term support level near 2,830. Any fall in the Shanghai Index may dip to the 2,800 level before rebounding and developing a consolidation near 2,830.

Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council

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