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.

Free Fallin' in Shanghai

The Fast Money crew may be wishing they hadn't ridiculed Peter Schiff after Monday's beating in the U.S. stock market. Dow tumbled 186 points or 2%, to 9135, S&P 500 down 24 points or 2.43% to 979 ,and Nasdaq lost 54 points or 2.75% to 1930. The supposed reason was the worry about U.S. consumers not spending enough to lift the economy (as if that's anything new).

But I think the reason is overseas, in China. Take a look at this chart. It is a daily 10-months chart of Shanghai Stock Exchange Composite (SSEC) Index. After climbing over 80% from November 08 low, it looks to have topped on August 5. For two weeks, the index has been selling hard.

I don't usually follow Shanghai. I tend to use Hang Seng as China proxy. So I was rather shocked when I pulled up the chart for SSEC. It sure doesn't look like a chart of an orderly stock exchange. What's normally a support line on RSI was easily broken with no resistance. 50-DMA offered hardly any support. Right now it's in the middle of nowhere. If the next trendline offer a support, it will be somewhere between 2600 and 2650. Long-term slow stochastics (set at 60,3) shows it's quickly approaching 50.
The chart shows several trendlines from the bottom. Notice the angles of the trendlines got steeper and steeper as the index ran to the August top. I think it was a typical climax top, with very exaggerated movement at the top and abrupt turnaround to the downside on August 6.

Maybe this is the normal behavior of this index. I don't know, frankly. All I know is that the current crash started when the Chinese central bank indicated it would "fine-tune" the monetary policy. The market clearly took it as tightening of credit, and quickly headed south.

Today, after falling 1.5% in the morning session there (Tuesday August 18), it is reversing and trying to go into a positive territory. It may finally indicate a trend reversal, by forming a doji candlestick. But with a wild market like that, it may just take a dump at the close. Who knows?

The U.S. market participants seem to think the key to the continued "recovery" (at least in the stock market) is China. (I personally think the key to the recovery here is here, the U.S.; if the U.S. doesn't buy, what could China do?)