(July 15): With remarkable — some might say suspicious — speed, the Purchasing Managers’ Index figures for June were released on July 1. The PMI reading fell to 51.7 in June. This was down from 52.1 in the previous month but above market expectations of 51.0. However, the latest reading points to the weakest pace of expansion in the manufacturing sector since October 2016.

The trade war is biting, as shown by the New Orders index. This index dropped to the lowest level since December 2015. It dropped 2.7 points from a month earlier to 50.0. The Prices Paid index also fell to a more than three-year low. The Prices Paid index fell 5.3 points to 47.9, the weakest level since February 2016.

If these measures are used to assess the success or failure of US tariffs and the trade war, then the answer appears clear. While not exactly bringing the economy to its knees, the results still show a steady and consistent impact.

If you think these figures do not seem quite right, then you are correct. These are not Chinese PMI figures. These are US PMI figures compiled and reported by the Institute for Supply Management.

The National Bureau of Statistics of China PMI figures were also released in early July. This rapid release of figures is widely derided because it is claimed the statistics could not be compiled so quickly. (Apparently, that is not an issue with the ISM US PMI figures). Many favour the Flash PMI released in Hong Kong several days before the end of the month.

China’s June PMI was unchanged at 49.4, missing market expectations of 49.5. This was the second straight month of contraction in manufacturing activity. New Orders dropped from 49.8 to 49.6. This was a 0.2 point fall for China compared with 2.17 points for the US equivalent. Buying levels dropped for the first time in four months, from 50.5 to 49.7. On the price front, input prices, or Prices Paid, decreased for the first time since January, from 51.8 to 49.

The Caixin China General Manufacturing PMI has some marginally different figures, but the trend remains the same. The latest readings point to the first contraction in factory activity since February. New orders, overseas sales and output all declined amid the persistent trade dispute with the US.

US President Donald Trump infamously claimed it is easy to win a trade war. Both the US and Chinese PMI figures tend to support those who say that nobody wins in a trade war.

US stock markets have performed better than that in Shanghai. The lure of cheap money has created a bubble in US market indices. The new lows made in US PMI readings are not reflected in the new highs made in US indices.

Technical outlook for the Shanghai market

The Shanghai market has suffered more over the same period, which appears to confirm those who forecast China’s demise in the face of US tariffs. This may be one occasion where the Shanghai Index performance is a better reflection of the underlying economic fundamentals than the Dow Jones Industrial Average is of US fundamentals.

The retreat from the resistance level near 3,040 has been more substantial than expected. The resistance level is well established, and it was expected to be strong. However, traders anticipated a consolidation near to this level rather than a strong retreat.

The short-term Guppy Multiple Moving Average moved above the long-term GMMA and this is often confirmation of a new sustainable uptrend. A pullback from resistance near 3,040 was expected, along with a period of consolidation prior to the next up move. Trend strength was based on support features. 

The first support feature was the value of the lower edge of the short-term GMMA near 2,978. This level failed.

The underlying trend support feature was the value of the long-term GMMA. The narrow separation in the long-term GMMA did not provide enough strength to halt the fall. The narrow separation showed that investors had become less bearish. Wider separation in the long-term group would show they had become more bullish. This separation did not develop. 

The failure of these bullish features suggests the index may continue to fall towards previous historical support near 2,830. The index did develop consolidation activity between 2,830 and 2,900. This consolidation developed within the body of the down-sloping triangle pattern, so it is difficult to use this as a definitive guide to future support behaviour as there is no well-defined resistance level near 2,900.

Traders are alert for the development of one of two scenarios. The first is the test of weak support near 2,900. This is a lower-probability outcome, but traders will be ready to trade any rally from 2,900 towards 3,040.

The second scenario has a higher probability because the support level is more well-defined and tested. The second scenario is a market fall to 2,830 and the development of a consolidation pattern. In this scenario, traders will trade the rally rebounds from 2,830 towards 2,900 and potentially higher.

It is clear that the breakout rally that developed over previous weeks has now ended. Investors and traders now wait to see where support will develop. Aggressive traders will enter on the first rallies from support. Cautious traders will wait for a successful test and retest of support before entering new trades.  

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.

This story first appeared in The Edge Singapore (Issue 890, week of July 15)