Chinese stocks are beginning to show 'cracks.' Here's what it means

China's stock market has been steadily rising all year, but according to one technician the charts are beginning to show signs of weakness.

The index has declined a little more than 2 percent in the past week, and is showing "a few cracks" after a solid monthslong upward trend, said Miller Tabak equity strategist Matt Maley. This recent weakness comes on the heels of a sharp downturn late last week.

While the Shanghai composite is still well above its lows hit in 2016, it has dipped below its trend line from this spring, Maley said Monday on CNBC's "Trading Nation."

"It's also breaking below the bottom end of what's called a broadening top formation, or a 'megaphone' formation. These formations are quite rare, and the fact that it's breaking below that is little bit of a concern," he said.

Part of this decline comes as China has made efforts toward deleveraging and controlling its high levels of debt, Maley said.

"Now that their National Congress is behind them, they seem to be back on that trail of deleveraging," he said, adding that rates on Chinese bond yields have risen meaningfully in the last couple of weeks.

The recent downturn in Chinese equities appears to be a period of consolidation after advancing for the bulk of this year, said Max Wolff, chief economist at the Phoenix Group. Indeed, the index has advanced a little more than 7 percent year to date.

"Clearly, China has had a pretty good run until fairly recently. That being said, there were these sort of hangovers that have been with us a long time, about the ability to organically sustain the growth rate," Wolff said Monday on "Trading Nation."

China reported third-quarter gross domestic product last month that met expectations, though reflected a slightly smaller expansion than the quarter prior.

The Shanghai composite rose modestly on Tuesday.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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