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Shanghai rally not yet a trend

Daryl Guppy
Daryl Guppy • 6 min read
Shanghai rally not yet a trend
(Feb 21): A rapidly increasing number of companies – from Apple to Australian commodity exporters – are issuing revised profit figures as the Covid-19 coronavirus slowdown hits their bottom lines.
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(Feb 21): A rapidly increasing number of companies – from Apple to Australian commodity exporters – are issuing revised profit figures as the Covid-19 coronavirus slowdown hits their bottom lines.

In China it is estimated that some 78% of companies do not have sufficient staff to run a full production line. About one-third of the country’s migrant workers will also not have returned to work at the beginning of March. Other surveys say 48% cite lack of staff as the biggest challenge in the next two to four weeks and 30% say restoring logistics lines is the major challenge.

Finally, surveys also report around 58% expect demand for output to be lower than normal in the next few months.

It does not matter who conducts the survey as the results are pretty much the same – the impact on domestic and international business are more than substantial. Foreign companies cannot quickly find substitute products or substitute suppliers and manufacturers.

China officials are quoted as saying that airlines and railways refunded US$4.5 billion ($6.25 billion) in tickets as people cancelled flights and train journeys.

Airlines refunded US$2.9 billion: Flight services also operated at around one quarter of capacity compared to the same time last year. Only 40 million rail trips were also taken compared with an expected 280 million trips.

An important distinguishing feature of the current Covid-19 epidemic in China – in stark contrast to SARS – is the significant impact of supply disruption.

This includes various travel bans, quarantine measures, transport and logistics blockages, plant closures or suboptimal operations due to workers unable to return to work, sourcing problems and extended holidays.

China is a big economy, but absorbing hits of this size is difficult. Unlike the US, China runs a budget surplus and has substantial overseas reserves which it can deploy to boost economic recovery.

Many Western companies are positioning themselves, or hoping, for a post Covid-19 stimulus package that will boost demand for commodities and services. They point to the SARS recovery as a model but this ignores some important differences between Covid-19 and SARS.

The Chinese economy is both larger and more diverse than it was during SARS so the distribution of stimulus is different and will have a greater focus on assistance to private business. State owned enterprises no longer enjoy the prime position they did during the era of SARS.

Xuan Changneng, vice director of the State Administration of Foreign Exchange said that since the Lunar New Year holiday, more than 87 businesses have received more than US$200 million in loans through a cross border, pilot blockchain finance platform. This is a drop-in-the-ocean glimpse of how recovery financing may develop.

This is also a rapid acceleration of the national government’s efforts in recent years to try to improve access for private business to financing in a state-dominated system.

Xuan said the platform is already handling foreign currencies. This extends financing options beyond domestic Chinese SME business.

However, the key words in the announcement are ‘block chain’ because this traceability helps cut corruption from the flow of recovery funds. It also provides a boost to the moves towards the creation of a sovereign digital currency.

The landscape is changing and the old structures of recovery are eroding. The trade and investment opportunities will now include some differences to those of the SARS recovery period.

Technical outlook for the Shanghai market

In 11 remarkable days, the Shanghai Index has rebounded from the devastating monster gap down and recovered all of its post-Chinese New Year losses.

In a market dominated by retail traders and investors this shows incredible confidence in both the handing of the Covid-19 emergency and faith in the future economic recovery.

This rebound is not driven by fund managers and institutions but supported by retail investors who took the opportunity to buy, and continue to buy, on what they saw as temporary weakness when the market opened around 2,730.

The index moved quickly and decisively through the first historical resistance level near 2,850. The next resistance level near 2,980 is stronger because it has acted as a support and resistance feature for much of 2019.

The 2,980 level is important because it marks the start of the monster gap fall that developed when trading resumed after Chinese New Year. It also marks the beginning of the fall after the monster gap down in May 2019. These gap points become useful reference points in future developments.

There is a school of thought that suggests ‘the gap must be filled’. This idea is that the price ‘gap’ will inevitably be obscured by subsequent price action in a new longer term up-trend. This is a load of rubbish: There is no such inevitable compulsion in the market.

The May 2019 gap was ‘filled’ and then the index moved sideways for several months before falling to lower lows than those made in May 2019.

The start and end points for the gap are significant because they represent points where market opinions about value made a dramatic change.

This suggests that the index rally will pause around the 2,980 level. Traders who followed the rally over the previous weeks will use this consolidation as an opportunity to lock in profits. The nature and behaviour of this pause anybody will provide clues to future trend direction and strength.

A consolidation around 2,980 is bullish because it signals a return to the trading band behaviour that dominated the market in the second half of 2019. The market oscillated around the 2,980 level in a broad trading band.

Repeated oscillation round the 2,980 level has the first resistance level near 3,040 and an historical support level near 2,900.

The current rally behaviour is defined with a very steep trend line. A valid and reliable trend line needs three anchor points.

These anchor points are created by a distinct pullback and rebound rally. A second and third anchor point have not yet developed so this fast-up move is defined as a rally rather than a trend.

The large gap down creates a total disruption to the calculation of averages and traders must wait for this impact to wash-out of the indicator calculation that relies on averages. This includes RSI, Stochastic, MACD and GMMA.

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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