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Key Support For Chinese Stocks, Watch Out Below!

Tyler Durden's picture




 

Submitted by Nic Lenoir of ICAP

We have been bearish on the Shanghai composite ever since the index rejected the 50-dma around 3,100. Overnight we tested and so far held the 61.8% retracement of the rally since 02/03/2010 at 2,971, and we have the support of a possible triangle formation at 2,947. Long term I remain bearish on China for reasons I will detail a bit more lower. However this potential triangle support need to be invalidated by a break to the downside. Indeed, triangles are almost exclusively continuation patterns within a trend, and in the case of an horizontal triangle it is always the case. Triangles however need 3 touch on one side and 2 on the other to be validated technically, so it is not a forgone conclusion that it is what the market is doing. This is why it is key break to the downside here, if not expect 3 months of consolidation between 3,000 and 3,240 (yawn).

I included again the chart of Copper and Copper/China PMI to show the obvious strong correlation between commodities ad China's PMI / Growth / Equity Markets. Copper gapped lower this morning. Ideally we would have preferred to gap below 332.20 to leave the price action from March 1st to 12th as an isolated island... wishful thinking. Still, we gapped down and as I have argued several times Copper has rejected a key resistance and fundamentals are not so good with Chinese PMI rolling over and inventories quite lofty. USDCLP has consolidated after the initial spike following the retest of the former downtrend channel at 505, further appreciation is definitely tied to a break lower of both copper and Chinese equities.

In terms of fundamentals it is very interesting that so many people focus on the Yuan appreciation. I am personally rather interested in the political bickering surrounding currency float for a totally different reason: China had last year 32% YoY growth in monetary supply. All the buildings going up in China are fueled by the PBOC printing its positive trade balance every month and a flurry of lending. When it comes to lending and despite some feeble attempts to curb it, January and February have in fact shown very strong lending by Chinese state banks. If you stop for a second and imagine the consequences of China letting the Yuan float, it is rater scary. There would most likely in the current environment be an influx of dumb money into China. This would hurt their competitiveness, as well as their rationale/ability to print their positive trade balance every month. So beyond the initial influx of money, it would hurt their exports and kill their monetary growth which historically is highly correlated to the performance of their stock markets and commodities. Also the next 20 years are a fast aging one for China's population courtesy of the one child (boy?) policy so that will add a nice deflationary headwind to the local demand. With all that factored in, I actually think the end result beyond initial speculation of a fully floating Yuan would be a very very weak Yuan. The problem is even more compounded when one considers the amount of debt piling up in China. The following article details and sums up what is going on in the land of Chinese loans better than I could or have the time t do it: http://articles.moneycentral.msn.com/Investing/JubaksJournal/is-china-ac...

This is why a slowly appreciating Yuan is the only possible path for the PBOC, but as always when you artificially build and foster imbalances there is a flip side... You will run into inflation problems and hiking rates on this huge pile of loans may not be a pleasant experience. The only real question is when the end game is, but I think overall this shows why China is pretty much bound to experience a very hard landing: 1929-style, or Zimbabwe- and then 1929-style is only a question of form but not end result.

Waiting for the big picture to kick in, it is probably worth taking partial profits on SHCOMP shorts, and add back on if we break 2,947/2,971. Long term preference is the downside, but we need a short-term technical validation for the momentum to build up now.

Good luck trading,

Nic  

 

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Mon, 03/15/2010 - 12:09 | 265862 Grand Supercycle
Grand Supercycle's picture

Bullish USD weekly chart exerts its influence yet again and DOW/SP500/EURO daily chart give bearish warnings.

http://www.zerohedge.com/forum/market-outlook-0

Mon, 03/15/2010 - 12:24 | 265880 the grateful un...
the grateful unemployed's picture

the copper settlement chart represents the kiss goodbye, a bob prechter term for a chart which breaks support and rallies back to the support line. as copper goes..

Mon, 03/15/2010 - 13:39 | 265966 estaog
estaog's picture

Guys, its time to pile into BIDU now, its only trading at p/e of 91! Get in there while its cheap.

Mon, 03/15/2010 - 17:51 | 266344 Master Bates
Master Bates's picture

I owned BIDU around 105.  Then, I lost my nerve and sold at like 130ish.  D'oh!

That could have been my income for the year if I kept my balls.

Mon, 03/15/2010 - 15:58 | 266163 johngaltfla
johngaltfla's picture

This cracks below 2500 and we dive like an airplane with no wings.

Wed, 03/17/2010 - 07:28 | 268175 alexdg
alexdg's picture

Copper at 340 this morning.

Wed, 04/14/2010 - 09:55 | 299903 mark456
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