Thursday, August 30, 2012

China Equity Bear Continues...

China Bear Market.

With two sessions remaining in the month of August, the Shanghai Composite (SHCOMP) is closing in on a new 4-month low, as well as a test of its March 2009 low of 2037.

From a technical perspective, let's notice that all of the action off of the major low in October 2008 at 1665 has formed an intermediate-term rounded distribution pattern.

Such patterns, especially on an intermediate-term basis, tend to move into a steep, near-vertical, phase of weakness prior to completion, which suggests that the Shanghai Comp could become unhinged in the days ahead, driving the index toward a full-fledged test of the October 2008 low at 1665.

Should such a scenario unfold, then the Shanghai Comp will have relinquished all of its 3-year post-crisis gains, while the S&P 500 remains approximately 112% above its crisis low of 666.79!

Something to ponder? What does the huge divergence mean? Is China cheap, or is the S&P 500 expensive? Or, can the divergence exist in a vacuum indefinitely?

Test of 2037 will be a major test for Shanghai Index and it will be broken and would be headed lower. The index may bottom out at 1665 (Oct 2008 Lows).


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