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Shanghai rebound rally

Daryl Guppy
Daryl Guppy • 6 min read
Shanghai rebound rally
(Feb 7): The novel coronavirus means it is crunch time for businesses, not just in terms of slowdowns or the collapse of tourism and international student numbers.
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(Feb 7): The novel coronavirus means it is crunch time for businesses, not just in terms of slowdowns or the collapse of tourism and international student numbers.

More importantly, it is also crunch time for your business relationship with China and your Chinese colleagues.

For example, how you respond will determine how your China business will grow after this crisis has passed. It may also determine how welcomed your business is in China after everything has settled.

It is commonly accepted that good business in China depends upon developing good relationships. The long lunches, numerous Moutai toasts and the elaborate gift giving courtesies all attest to the importance of maintaining these relationships.

But for many outside of China, these relationships lack substance. Often, they are learned dance-steps – tolerated but without genuine meaning.

However, it will take a crisis like the coronavirus to stress test those relationships.

For example, what will you do when you are asked to assist with sourcing medical equipment, masks, medical aprons and other items? An outright refusal to assist could inflict deep scars.

Have you also enquired about the well-being of your key contacts and their families, or have your enquiries then shifted quickly to questions about the resumption of supply and trade for your business?

Trade will resume, but it may not be on the same terms as before if your questions have revealed you have greater concerns about profits than about health.

Furthermore, do you call this a coronavirus or the Wuhan or China flu? Your choice of terminology can inflict unintended damage on your future business because your Chinese partners are sensitive to what they see as an underlying racism.

Also, compare and contrast the commentary you hear in the street and on Western social media with the chatter coming from Chinese social media platforms like WeChat.

For your Chinese colleagues, this is a national emergency and it is the duty of citizens to assist, to follow quarantine instructions and to avoid spreading rumours and misinformation. There is a clear sense of national unity and pride so to attack or disparage one is seen as an attack on all.

China is keen to make the response to the coronavirus different to the response to the 2003 SARS outbreak. It is an uninvited test of political maturity and yet it has been greeted with border closures and racism despite the World Health Organization saying these measures are both unnecessary and counterproductive.

The response stands in stark contrast to H1N1 swine flu which originated in the borderlands of the United States and Mexico which infected more than 1,600,000 people in 214 countries with a 17% mortality rate leading to more than 284,000 deaths.

So it is crunch time for your business relationship with China. If your relationship is tested now and found to be jiu rou peng you (wine and meat friend) then you can expect it to be much more difficult to grow business back to pre-coronavirus levels when the China recovery develops.

Friends help friends, particularly in times of crisis. Every bit you contribute will be appreciated and remembered. You might not be able to do much, but every bit can count even when it starts just with a change in attitude and a genuine concern about the health and safety of your Chinese colleagues.

Technical outlook for the Shanghai market

As expected, the resumption of trading saw the Shanghai index gap down below the 2,850 support before rebounding. This is classic overshoot behaviour where a bear market over-reacts before rebounding quickly.

However, this type of situation is sometimes described as a dead cat bounce. This means the market dips to an extreme, rebounds and then falls even further.

The Shanghai index rebound does not have the characteristics of a dead cat bounce. The gap down was expected because there was a high level of pent up selling pressure from the market being closed for 10 days. The Index opened lower at 2,717 and then rose during the day before retreating to finish 30 points higher at 2,747. The next day opened lower but quickly rebounded and closed at 2,783.

A full bearish collapse is smothered with red candles showing strong selling pressure. The Shanghai Index is however flooded with green bullish candles which show good buying pressure. The index did gap down to a much lower starting point at 2,717 but each day has closed higher. This proliferation of green candles is bullish.

That is not to say we are going to see a return to 3,120 highs in the near future. The recovery will be slow and significant resistance obstacles are in the way of a fast uptrend development.

However, the behaviour shows a steady vote of confidence in the Chinese economy, its ability to withstand this economic disruption and faith in its ability to resume economic growth.

When analysing these market conditions, we cannot apply any indicators which are based on a calculation of averages. This includes RSI, Stochastic, MACD and GMMA. The large gap down creates a total disruption to the calculation of these averages and traders must wait for this impact to wash-out of the indicator calculation.

If the longest calculation period is 21 days, then traders must wait 22 days before the indicator will deliver accurate and meaningful signals.

Analysis relies on trend lines and proven support and resistance levels. The index has rebounded quickly from the overshoot level and is testing the first long term resistance level near 2,850. This has previously acted as a well-developed historical support level so there is a high probability this level will now act as a strong resistance level. This means the index may consolidate around this level before continuing a rise towards the next resistance feature near 2,980.

This is the level that provided brief support on Jan 23, the last day of trading prior to the Chinese New Year break. This is the beginning of the monster gap down and typically these levels act as strong resistance features for any market recovery.

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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