(Oct 23): In the week of Oct 16, attention was focused on the potential for markets to fall and the rise of China’s President Xi Jinping. They are both connected by a common thread — China’s increasing prosperity, particularly its acceleration under Xi.
Of particular importance is the outward flow of Chinese capital into markets as diverse as the US bond and equity markets and the property markets of Australia and Vancouver. Also important is the developing potential for the diversion of Western investment flows into China both as a consequence of the expansion of Belt and Road Initiative (BRI) projects and the inclusion of China in the MSCI indices.
The 1987 stock market crash was very unusual in that there were no end-of-uptrend patterns in the market. There were several infamous market calls. The inconsistency of market calls using these methods post-1987 suggests that their 1987 success was coincidence and not correlation. Call a crash long enough — as with the last three years of Dow Jones performance — and eventually a crash will happen. Like a game of musical chairs, it is the last one to call the crash who looks like they know what they are talking about.
Market mechanisms and trading methods have changed since 1987, most notable with the automatic trading halts designed to stop cascading price falls. However, this does not make markets immune, particularly when capital is steadily added or withdrawn. Increasingly, our markets rely on the flow of Chinese capital to underpin rises. China’s continued prosperity and progress towards opening the capital account are important factors in the continuation of the rising market trend.
US President Donald Trump’s decision on Oct 17 not to label China a currency manipulator has removed a trigger for the sudden withdrawal of Chinese capital and reduction of trade with China.
Increased Chinse prosperity, as outlined by Xi in his speech at the Communist Party congress on Oct 18, also creates an increased demand for domestic investment. China expects to be a major supplier of goods and services to both BRI projects and the associated expansion of economies within the immediate New Silk Road region. If we consider the world as a series of economic blocs, it is clear that the only substantial growth is being generated within our regional economies. Western economies are largely stagnant, despite rising market indices.
As China opens its capital account and makes it easier for Western investors to invest in Chinese capital markets, there will be an inevitable reallocation of capital resources. It is not enough to drive a repeat of the 1987 market crash, but it does remove the firewood from under the cauldron.
In 1987, the US was the dominant market in the world. There were no other challengers, so the Dow collapse was replicated immediately in all other markets. In 2017, the US is just one of two powerful global market players. Investors need to watch both China and US markets closely. Ructions in either have profound impacts on our markets.
The Shanghai Index is moving in a narrow trading band, with support near 3,340 and resistance near 3,390. The index is oscillating around longterm historical resistance near 3,360. This is consolidation behaviour, but it is developing within the context of a well-established and well-supported uptrend.
The long-term group of averages in the Guppy Multiple Moving Average indicators is the key guide to the way investors are thinking. The continued wide separation in the longterm GMMA shows strong investor confidence. The GMMA shows that when the index retreats, investors enter the market again as buyers.
This separation is now around 36 points, which is the same as the 36-point separation in the week of Oct 9. This consistency in the degree of separation shows very good trend strength. This shows investors remain very confident about the future of the trend and suggests they will be strong buyers when the rebound rally moves above 3,390. The rebound from the long-term GMMA is strong and consistent and has also moved quickly above the long-term resistance level near 3,360 and remained above this level.
The 3,390 level has developed as a new and temporary resistance level. The slight pullback around 3,370 is part of a new trading-band consolidation pattern prior to continuing the new uptrend rally. There are three aspects to the bullish GMMA analysis and trend rebound.
The first feature is the steady degree of wide separation in the longterm GMMA. Steady separation is bullish. Rapidly increasing separation is a sign of a bubble. The current degree of separation indicates a steady and sustainable uptrend.
The second feature is the way the upper edge of the long-term GMMA has moved well above the resistance level near 3,290. The upper edge is very near to historical resistance near 3,360.
The third feature is the continued rise of the lower edge of the longterm GMMA above the resistance level near 3,290.
Investors entered the market again when the index rebounded strongly from the upper edge of the longterm GMMA as a support level. This new rebound rally signals a resumption of the uptrend, with a move above 3,360.
The longer-term upside target is near 3,640. This was a previous long-term resistance level created in November 2015 and January 2016. This is a steady, low-momentum up-trend, in which the index has successfully tested and then rebounded from the GMMA support level. The steady degree of separation of the long-term GMMA indicates increased investor confidence.
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