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The U.S. stock market has been put through the meat grinder for the past week, thanks to China. Jim Cramer knows that the Chinese stock market has become a real problem, but just how bad are things really looking over there?
Looking at the daily chart of the Shanghai Stock Exchange Composite, the broadest benchmark for the Chinese stock market, Collins knew the market was troubled.
The Shanghai Composite was absolutely creamed from mid-June to mid-July, losing about one-third of its value in less than a month. So, while the market did rally for the past couple of weeks, Collins said that was nothing more than a bearish consolidation pattern where it was marking time before its next leg down.
Collins also noted that the Slow Stochastic oscillator was screaming for help. Often technicians use the Slow Stochastic to figure out of a security is overbought or oversold. Sure enough, they were in extreme overbought territory right before Sunday night's selloff. Meaning, the July rebound had run up too much, too fast and was due for a nasty correction.
To make matters worse, Collins also pointed out that the Shanghai Composite's short-term 34-day moving average has now crossed below its longer-term 55-day moving average. That's basically a Chinese equivalent of what U.S. chartists refer to as the dreaded death cross pattern.
"In short, Collins thinks that the formerly bullish Chinese freight train has now come to screeching to a halt, and it's now changed direction and is chugging rapidly toward bear-town," Cramer said.
But to really understand what is happening, the Shanghai Composite weekly chart paints a solid picture. It showed that the market basically went from being range-bound for ages, to a steady rally in late 2014, to totally wild moves in 2015.
Collins saw that the Chinese stock market benchmark does have a floor of support around 3,400, which is roughly 260 points below where it currently trades. However, he expects it to break below that level soon.
However, if the Shanghai Composite falls below 2,700, then Collins says we would be looking at almost an exact repeat of when the U.S. market tech bubble burst, back in 2000.
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Charts show that from October 1999 through the summer of 2001, the Nasdaq Composite showed stunning similarities to the Shanghai Composite today.
"The rally was incredibly similar, and now the decline is following virtually the same trajectory, too," Cramer said.
Overall, the charts suggest to Collins that investors could see a total wipeout of the Shanghai Composite's gains from last year. Ultimately, if China wants to avoid the same fate as the Nasdaq in 2000, then it needs to find a new floor of support without violating its recent lows.
So, while history may not repeat itself exactly, Cramer can't ignore the patterns that seem to rhyme right now. China could be in for a long road ahead.