Since their remarkable recovery in 2009, China's stock markets have since been characterized by a long drawn-out sideways movement punctuated by rapid rallies and equally precipitous falls. Many of these have been initiated by changes in Government policy, particularly in relation to changes in interest rate and bank reserve ratio policies.
The Government has been applying the classic Chinese strategy of 'pulling-the-firewood-from-beneath-the-cauldron'. This is done by deliberately removing the heat from the market by pricking speculative bubbles without creating a general market collapse and managing the need to re-orient an economy that was too dependant upon exports for growth.
This broad picture is best seen on the weekly chart. It’s a story of support and resistance levels. The upper resistance level is near 3300, while the lower level is near 2350. This is a 27 percent range and provides some good trading opportunities for those who can catch the rebounds and retreats. For long-term investors the picture is less appealing with the market showing poor year-on-year results.
The market swings between two consolidation areas. The upper consolidation area is between 3000 and 3300. The lower consolidation area is between 2350 and 2700. Most of the time the index is in one or the other of these consolidation ranges. The moves between the consolidation areas – the middle area between 2700 and 3000 – trend to be very rapid. Trading breakouts above 2700 for a move above 3000 provides good short term trading opportunities.
In the longer term there is no evidence on the chart that suggests an increased probability of a rapid move above 3000 and a breakout above 3300. If this did happen, then the upside target is calculated in the area near 4300. This is a projection of the broad trading band.
On the bearish end, the downside targets are near 2350. A failure of the recent tests of support near 2700 can see a rapid fall towards 2350. A fall below 2350 sees a retest of the 2008 low near 1700.
This is a market building a long term foundation. It is the result of a restructuring of economic activity. It reflects the ongoing structural changes in the Chinese economy. The chart shows no distinct bias upwards or downwards so traders and investors can expect of prolonged period of sideways movements with short term trading opportunities. Bottom to top returns of 27 percent are a handy addition to any portfolio, but achieving these returns requires active trade management.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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