Digging to China

• Posted by Greg Harmon
• on December 13th, 2011

When I was a kid growing up in what was then the cow pasture of Basking Ridge, New Jersey we had a mostly dry creek bed at the edge of the property that was lined with sandy clay like soil along the bank. We would play with toy soldiers there a lot and occasionally get a shovel out and start digging a hole. Whenever the little kids in the neighborhood came by to ask what we were doing we would tell them that we were digging a hole to China. With some geography lessons I now know it would be somewhere in the Indian Ocean, and if I managed to get through the Magma core alive I would likely drown as it poured in to my hole.

Now many years older and a couple of degrees wiser (I hope) I have discovered another problem with China. I continue to hear that China is an opaque marketplace with a planned economy and if they want to want to prop up the world economy they can at their own pleasing. I am not so comfortable with that assessment. My tool of choice for this assessment, price action in their domestic stock market, shows them digging a deeper hole, perhaps trying to get to the United States. Let’s take a look at the Shanghai Composite, $SSEC, starting with the monthly chart.

Shanghai Composite, $SSEC, Monthly

The monthly chart of the Shanghai Composite, $SSEC, above shows a large run higher from mid 2005 to mid 2007. It retraced most of that move finding support just below the 1750 level that provided great importance early in the decade. After retracing only 38.2% of the down move through the course of 2009 it has been falling back and after stalling at the 61.8% level of 2320 twice, is now heading lower again. As it heads lower the Relative Strength Index (RSI) continues to trend lower with the Moving Average Convergence Divergence (MACD) indicator holding slightly negative near zero. This market is set up lower on a long term basis with the next support coming at the 1661-1750 area and then 1500 and 1350 below that. that is a big hole they are digging.

Shanghai Composite, $SSEC, Weekly

The weekly chart also continues to dig a big hole. After falling from the symmetrical triangle it has made a series of legs lower. The RSI on this timeframe is also slowly trending lower with a MACD that is negative but near zero. A slow grind. This view shows that there is a chance to catch the fall around the 2060 level and that there is a Measured Move on this leg lower at 2010. But all of the Simple Moving Averages (SMA) are rolling lower. No good news here yet and 2060 still leaves a lot of digging to do.

Shanghai Composite, $SSEC, Daily

Finally on the daily chart, down at the bottom of the existing hole, it looks like more digging going on. The long red candle Monday closing near the low and at a new 2 year low, suggests more downside. Tuesday dropped even lower down to 2248 (not shown). The RSI on this timeframe also is trending lower and the MACD is negative but may be improving. The SMA’s however show the trend is down if there was any doubt.

Hitting lows not seen in over 2 years and with no indicators flashing oversold, in fact still with much room before that happens, is anything but a positive indicator for the future of the Chinese market. I suppose the pundits might suggest some scheme that the Chinese government is running that requires a lower market valuation, but in my experience the first thing you have to do to show the world that you are strong and in control when you are in a hole is to stop digging. Until that happens expect that the Chinese economy will continue to slow down, impacting the growth in the rest of the world.

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