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The East's and West's different takes on trade war

Daryl Guppy
Daryl Guppy • 6 min read
The East's and West's different takes on trade war
(June 17): With the trade war, there will be pain in the short term, but on the scale of historical events, that is unimportant. The objective is to improve life for ourselves, particularly our children. We are very interested in understanding new ideas s
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(June 17): With the trade war, there will be pain in the short term, but on the scale of historical events, that is unimportant. The objective is to improve life for ourselves, particularly our children. We are very interested in understanding new ideas so we can adapt them to our own circumstances. We have no appetite for conflict, but if pushed, then we will push back.

No, that is not Middle America speaking, although it could be.

Recently, I spoke at a conference and was locked on a cruise ship in the Bohai Sea between China and North Korea with some 3,000 -middle-class Chinese. I was one of just four Westerners on the ship, and the only one with a smattering of Mandarin. My conference topic, of course, was trading financial markets. My conversations with Chinese delegates and passengers were about US President Donald Trump, trade wars, economics and economic development.

My conversations with my US colleagues were about Trump, trade wars, Chinese history and Chinese culture. For all of them, it was their first time to China. They brought with them the full package of myths, misconceptions and ignorance that characterise much of Western thinking about China. Just as the conversations with Chinese delegates reflected Chinese thinking, my conversations with my Western financial market colleagues reflected US thinking.

When we talk of Trump’s appeal to Middle America, we often think it is an appeal to the middle class, but my colleagues suggested that this is incorrect. Trump’s Middle America is the geographical middle America — the farmers on the great plains, the struggling manufacturing areas on the edge of the geographical middle of the US. To be sure, there are disenchanted voters in the cities, but it is this geographical middle that provides the foundation for Trump’s support and policy appeal.

These are John Steinbeck’s modern-day struggling agricultural poor from The Grapes of Wrath. With their heads down, they do not see the world beyond their feet. It is frightening to look beyond the horizon and Trump offers them protection from these fears.

My Western colleagues, who were by no means ill-informed, were simply stunned by what they saw in Beijing. They seemed to have little conception that Beijing was a modern urban metropolis that more than rivalled the crumbling infrastructure of New York, Los Angeles or San Francisco. To their surprise, they found a professional, vibrant, exciting, optimistic and confident environment.

Their understanding of Chinese culture was essentially limited to their local Chinese takeaway in Austin, Texas, but to their credit, they were interested in understanding the cultural impacts on behaviour. Sometimes, it was as simple as why Chinese women walked under open umbrellas when it was not raining. Other concepts were more complex.

Their understanding of modern Chinese history was facile at best and reflected the shallow assessment of Western media and Eurocentric history books. Apart from the Great Wall, they had essentially no understanding of ancient Chinese history.

As a result, they filled their gaps in knowledge by projecting their own responses onto China. China must be aggressively expanding to protect trade because that is what they would do as Americans. The Chinese population must rise up against oppression, because that is what they would do as Americans. The Chinese will surrender because of the US’ overwhelming economic superiority.

What a contrast to my conversations with the Chinese delegates. Theirs was an open-minded approach, with a genuine concern for how the trade dispute could be resolved with face on both sides. The most unanswered question in Chinese conversations? How do we convince the Americans that China is not interested in global domination?

Technical outlook for the Shanghai market

The Shanghai Index has developed a bullish breakout. This is consistent with the Relative Strength Index (RSI) divergence signal. The breakout is signalled by the success of support near 2,840. The breakout is confirmed with a strong move above the downtrend line that defined the upper edge of the down-sloping triangle.

Chart patterns are important because they allow traders to calculate high-probability price targets. With a triangle pattern, it is the base of the triangle that is used for the measurement. The base is the vertical distance between the start of the sloping trend line and the horizontal support level. This value is measured, and then projected upwards from the point where the price moves above the downtrend line.

The calculation gives an upside target near 3,050.

Breakouts from down-sloping triangles are often difficult because the down-sloping triangle is a bearish pattern. A bullish breakout has to be very strong to reach the target level. Often, after the breakout, the price will retreat and use the down-sloping trend line as a temporary support level. This means that the final rally breakout has a slightly lower target than the first calculation. Traders are alert for this condition to develop.

There is a good probability of success with this breakout pattern because the Shanghai Index downtrend is relatively weak. The Guppy Multiple Moving Average relationships confirm this weakness. The trend has been down, but the long-term GMMA has not separated to any great degree. This suggests that investors are cautious rather than bearish. If investors were strongly bearish, then the long-term GMMA would be well separated. The narrow separation shows there is not a strong bearish thinking among investors. When the index rises, investors are more likely to become buyers and join the rally breakout.

The breakout target calculated from the triangle pattern is independently confirmed by other features of the Shanghai Index chart. The index has a historical resistance level near 3,040. In normal situations, when a rally develops from a support level, it usually moves quickly towards the next resistance level. The 3,040 level is both a historical resistance level and near the calculated price target from the down-sloping pattern.

The combination of four bullish features suggests the market is preparing for a rally, and this rally may develop into a new uptrend. The bullish features are the successful test of support near 2,840, the RSI divergence pattern, the breakout above the upper trend line in the triangle pattern and the small degree of separation in the long-term GMMA.

Traders and investors watch for the short-term GMMA to move above the long-term GMMA because this will confirm the beginning of a new uptrend.

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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