SINGAPORE (Feb 4): Several weeks ago, Canada detained the chief financial officer of Huawei Technologies at the request of the US. Huawei is, by many measures, the second-largest manufacturer of mobile phones and a major global supplier of telecommunications equipment. This week, the US issued a list of charges against Huawei, some dating back to 2011. It included a charge of stealing commercial secrets, specifically in relation to a robotic finger called Tappy, created by T-Mobile.

These events from seven years ago were settled by a US court in 2017. Fortune magazine called the charges “Trumped up”. Time will tell, and it is not my intention to discuss the merits of the US allegations. However, investors need to be much more worried about the methods used by the US to block China’s technological development. The Huawei charges are both an example of this hostile action and a precursor to the type of risk that investors will face in the future. It is a mistake to think that this impact is restricted to Chinese companies alone.

As the race to dominate the world’s next-generation 5G networks intensifies, US President Donald Trump’s administration is working to stop Huawei equipment from making its way into the communications infrastructure and so give Huawei’s American and Western competitors what amounts to a state-sponsored advantage.

The time has come to recognise that the attack on Huawei is part of a much broader strategy to stop China’s technological advances and to head off the threat to US dominance in this and other areas. Security concerns — often alleged but rarely verified — are used as a weapon to destroy commercial activity. Investors need to reshape their understanding of risk in this environment because the collateral damage cannot be underestimated.

This week, one of Australia’s largest telecom companies, TPG, abandoned plans to roll out a 5G network because its plans relied on using more advanced and cost-effective routers and equipment from Huawei. It decided that Australia’s banning of Huawei from government contracts, largely at the request of the US government, made it impossible to roll out these upgrades. This not only impacts TPG, but also hands a commercial advantage to its main competitor, Telstra, who mainly uses US company equipment.

The Western Australian government has engaged Huawei in a A$206 million ($202 million) contract to supply equipment for its rail system upgrade — a project that involves many other Australian Securities Exchange-listed contractors. The state government is coming under increasing political and media pressure to cancel the contract with Huawei.

Investors need to be alert for similar collateral damage impact on their portfolios. This is becoming much more than just a tiff over tariffs and trade.

There is a pattern of similarity between this incident and the 1937 Marco Polo Bridge incident near Beijing, and the infamous claim that Saddam Hussein had weapons of mass destruction. In the first, a Japanese soldier failed to return to his post after a raid into Chinese territory. The Japanese demanded a search for the missing solder and the Chinese refused. The soldier returned to his unit, but his absence was used as an excuse for the Japanese invasion of China.

It is not suggested that the Huawei ambit is a precursor to these types of attacks, but nor can investors dismiss this as the usual type of trade argy-bargy. Investment portfolios are at risk when truth is suborned to convenient fiction.

Technical outlook for the Shanghai market

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The Shanghai index breakout has paused and is testing support at the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This remains consistent with a steady move above the downtrend line. The early momentum of the breakout has paused, but this is consistent with the usual behaviour prior to Chinese New Year (CNY).

Many investors use the days prior to CNY as an opportunity to “clean out” their portfolios. This exerts a bearish pressure on the market and the pullback is consistent with this behaviour.

The successful test and breakout from the downtrend must meet three conditions.

The first is a strong move above the value of the downtrend line. This has developed, but the breakout has not continued. The breakout momentum has paused but not fallen below critical support features. This remains bullish. The breakout is fully confirmed when the index retreat uses the value of the downtrend line as a support feature for a rebound continuation of the rally.

The second condition is a strong move above the value of the upper edge of the long-term GMMA. This has not developed and signals a loss of the strong initial breakout momentum. Many investors will wait until after CNY to see a stronger breakout before they become buyers.

The third condition is compression in the long-term GMMA group of averages. The long-term GMMA continues to turn upwards and this is bullish. Slow compression in the long-term GMMA also continues and this is a bullish confirmation signal. The continued slow compression in the long-term GMMA shows that the breakout is developing investor support.

The strong historical resistance level is the target for the trend breakout. The 2,690 level has been a major resistance and support feature.

The short-term GMMA is inside the value of the long-term GMMA and this shows traders continue to actively trade the breakout above the trend line. Traders will take short-term profits because the index will probably consolidate around 2,690 before developing a longer-term uptrend.

Aggressive investors enter the market when the breakout above the trend line is confirmed by a successful rebound rally from the lower edge of the long-term GMMA. Conservative investors wait until the index is able to move above 2,690.

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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