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Charting Asia
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In the animated film, Kung Fu Panda, Master Oogway, the old wise tortoise tells Dustin Hoffman's red panda character Shifu, "There are no accidents". The best technical analysts will reach a similar conclusion when a chart like Hong Kong-listed Sinopec, flashes on the screen.
Keep in mind, the question to be addressed is which is more important in determining market behavior and market pricing: Fair value based on fundamentals, or market value created by psychological trading behavior?
In the case of Sinopec [SHI Loading... ()], its chart is dominated by trading bands with well defined levels of hope, of fear and investing glory.
In theory, the Chinese Government's sudden reduction of fuel subsidies last week, should have had a substantial impact on Sinopec. In reality, the chart shows significant constraints on trading activity. Hope is limited, and trading glory is a well defined objective.
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The analysis starts with lines 2 and 3. These are support and resistance levels. Line 2 is not plucked out of the air. It provided significant resistance in 2006 and 2007. Line 3 defines support and consolidation in 2007.
The first question relates to the impact of the fuel subsidy reduction. It propels price from line 2 to line 3. The overshoot of enthusiasm is quickly dampened by the significant resistance near the value of line 3.
The upper target for a successful breakout above line 3 can be calculated by using the width of the trading band between lines 2 and 3. This gives an upside target of 9.00. A very powerful breakout is capped near the value of line 5.
Unlikely as it appears, the market could in time, shrug off the bullish impact of the fuel subsidy increases. In this situation the downside target is set near line 1.
The structure of the trending activity with Sinopec is well defined by these trading bands which are all of similar width. This band width behavior can be projected upwards above line 5. The relationship is not as well defined, but it remains strong enough to define price target and consolidation areas. This high level of correlation in the trading bands sets well defined trigger points and risk management points.
A sustained breakout above line 3 near 8.20 has an initial upside target near 9.05. A move above this has an upside target near 9.85. Traders taking a long side position near 8.20 place a protective stop near 8.10 as a move below this level us a clear indication of a retest of support near line 2 at 7.30.
In trading terms, this is a beautiful chart for technical analysts. It is a trap for those who trade the Hong Kong listing as a proxy for the Shanghai listing. The behavior of the Shanghai-listed Sinopec is very different. The trend behavior is different and does not show a consistent domination of trading bands. The reaction from Chinese traders to the subsidy announcement is very different to the reaction of Western traders in Hong Kong.
The classic economic and market models rest on fair value and describes pricing activity in the market as subject to 'irrational exuberance'.
Our study of the China and Hong Kong markets with a parallel listing of China-based companies suggest that psychological trading behavior has a much greater role to play in correct market pricing. It suggests that the market price is the rational and valid price and acknowledges an emotional component in pricing.
The variety and difference in trend behavior in these parallel listed stocks challenges many foundation assumptions about the relationship between price, value, fair pricing and the extent of the role of emotional behavior in setting enduring price relationships.
The analysis of Sinopec's H-shares starts with an assumed reaction to the news release, but the trading solution is determined by the trending, or trading band behavior shown on the chart. In short, the stock does not shoot up as one would expect but instead trades firmly within the established bands.
In this respect, Sinopec's H-shares are best analyzed and traded on its merits, and not as a proxy of the assumed behavior of the mainland-listed stock.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.
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