ECONOMIC STRATEGY - CHINA and US Markets

The Chinese and the US economies have developed divergent paths. One is a strong vigorous bamboo shoot whilst the other shows green shoots which some people are now describing as withered or yellow shoots. It’s an issue I discussed last week on CNBC Asia with US fund managers and Asia analysts. China GDP due out this week is expected to show a 7.8% annual growth and some analysts are questioning whether this is sustainable. We start with current China market analysis and conclude with US market analysis. The first extract is from my weekly column in the Beijing financial weekly, Hong Zhou Kan, and the second extract is from my weekly column in the Monday edition of Shanghai Security News.

CHINA MARKET

China markets are focussed on the potential end of a prolonged uptrend. The very rapid rise in the Shanghai Index above 3000 was an inevitable invitation to a pullback and retest of the 3000 support level.



The key question is to decide if the pullback is the collapse of a bubble, a major change in trend direction or a temporary retreat in a well established uptrend. The answer has a significant impact on Hong Kong and Taiwan markets which have been increasingly linked to the Chinese recovery. Chart analysis provides the tools to help answer the questions more accurately than the mixed bag of delayed fundamental information that comes out of China in Government reports and anecdotal evidence. The market moves 3 to 6 months ahead of the confirming fundamental information.

The market has avoided a bubble situation. The index has clustered near the upper edges of the short term GMMA and the pullback has tested the lower edge of the short term GMMA. The pullback has restored the normal degree of separation in the short term GMMA. This reduces the probability of a bubble developing.

The most important analysis tools for identifying a major trend change are divergence patterns and chart patterns. The most reliable analysis tool for the Shanghai market is the Relative Strength Indicator (RSI) divergence. This develops when the trend line placed on the RSI moves in the opposite direction to the trend line placed on the Shanghai index. Currently the trend lines both move in the same direction and this is a trend continuation confirmation signal. This suggests there is a low probability of a major change in the direction of the trend.

The behaviour of the index suggests the current market activity is a temporary retreat in the environment of a strong and stable uptrend. The strength of the uptrend is confirmed by the long term GMMA. The lower edge of the long term GMMA is higher than the historical support level near 2700. It is also near to the value of the up trend line. The upper edge of the long term GMMA is near the historical support level of 2900. This combination of support features confirms strong support for any market retreat below 3000. They show a high probability of a rebound and a continuation of the established uptrend.

The 3000 level is a strong historical support and resistance level so the market may develop into a sideways pattern and a broad trading band in the 2900 to 3000 area. This sideways movement will add more stability to the up trend.

Increased trend stability and durability will have a positive impact on the greater China markets. Traders can use this pause as a buying opportunity to add to positions as price declines are more likely to be a temporary retreat rather than a trend change.


US MARKET

The key development in the American DOW Index is the development of a rounding top pattern. The rounding top pattern is a reliable indicator of a significant trend change. This rounding top pattern is shaped like an umbrella. The upper edge of the pattern is located near 8900 and the support level is near 7800. The distance between support and the peak is measured. This value is projected downwards below the support level to give a potential downside target. This is located near 6800.



The pattern is confirmed in two steps. The first pattern confirmation develops when the DOW Index is not able to move above the value of the curved downtrend line. This is currently near 8300.

The second pattern confirmation comes when the DOW index closes below the support level at 7800. When these conditions develop there is a high probability to market will continue to fall and reach the target low near 6800.

The DOW Index also has developed a small head and shoulder chart pattern. The left shoulder is created by the rally in 2009 May. The head is created by the rally in 2009 June. The right shoulder is created by the current rally. Currently this chart pattern is not completely developed. There is enough information to estimate the head and shoulder downside target projection. This is located near 7300.

The rounding top and the potential for the head and shoulder pattern development both confirm the high probability of a continuation of the downtrend in the DOW index. The suggested target for the market fall is between 6800 and 7300.

Too many Western analysts are blinkered by the belief that economic recovery is entirely dependent upon the US and they ignore the market reality shown by the market index activity.

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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.