Tuesday, May 11, 2010

Will Shanghai Lead the Way ... to the Downside?

Well. Calling S&P500 to 1300-something was such a wonderful timing, wasn't it? While it could still get there, the timing is anyone's guess at this point, with the European "nuclear" option to save euro lasted 12 hours.

In the meantime, I was reading an article at Bloomberg, which said "China is entering a bear market". WHAT?

Shanghai Composite Index lead the way to the upside; it bottomed in October 2009, nearly 6 months before the US stock market bottomed in March 2009.

To my surprise, I found out that Shanghai totally underperformed Dow. I don't regularly check Chinese indices, but all the news about China being the engine to pull the world out of the recession has given me the impression that the stock market there is booming as well. But no. Shanghai index retraced barely above 38.2% Fibonacci retracement, while Dow touched 61.8%. Shanghai was going sideways since August last year, forming a symmetrical triangle. But instead of breaking in the direction of the previous trend (which was up), it broke down. Technical indicators (Aroon, Slow stochastics, histogram) are all negative, and already flashed a sell signal.

Dow hasn't reached that stage yet, as you see. Technical indicators are still in a bullish territory, although the MACD histogram has been one big negative divergence ever since March 2009. However, with the last week's freefall thanks to algo bots and with "we will do whatever it takes" Europe, it feels like the floor has been yanked from under our feet. And what we saw that day under our feet was a void, a blackhole.

Those algo bots were busy all day Friday and all day today to prove (to the regulatory authorities) that they are worthy provider of liquidity, capable of supporting the market. I wonder if they were successful in convincing investors. The stock market doesn't feel like a pricing mechanism any more.

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