The Chinese stock market appears to be setting up for a monster rally. Given that the U.S. economy is imploding with most of its small businesses, which are the backbone of the country, either dead or dying, it seems very odd indeed that U.S. stock markets have been outperforming those of China and making new highs. The explanation for this, however, could not be simpler. In the face of economic collapse the Federal Reserve has been creating vast quantities of money to head off a credit lockup, and at the same time has used the crisis as cover to funnel trillions into the pockets of its crony pals in major banks, corporations and on Wall St., while the general population gets crumbs in the form of derisory “stimulus checks.” Whilst big corporations and the super wealthy are benefitting from all this, the fact remains that overall the U.S. economy is being destroyed, by design.
In marked contrast, while China certainly has serious debt problems as well, its economy is not being willfully destroyed by lockdowns etc. What this means is that it is gaining a competitive advantage out of this setup and thus the balance of power is changing in favor of China.
It is with the benefit of this understanding that we will now proceed to examine the latest charts for the Shanghai Composite index.
On the 20-year chart for the Shanghai Composite we see that there was a massive bubble in 2006–2007 that sucked in everyone toward the top, including housewives and taxi drivers etc. This led inevitably to a crash as the A-wave of a 3-wave A-B-C bear market, which was then followed by a “Son of Bubble” bull market in 2014–2015, when everyone thought the game was on again. This was followed by another crash and another 3-wave A-B-C bear market. Notice how this last bear market has found support at the boundary of a Bowl pattern, which since this is China, is more appropriately labeled a “Wok” basing pattern. Right now the market is simmering and being brought to the boil by the now rising boundary of the Wok, with the boiling point being the resistance level shown—once it gets above that it is likely to take off strongly higher.
The “Son of Bubble” top was called a few weeks before the peak on the site.
The “Big Daddy Bubble” sucked in all manner of inexperienced traders towards the top, including housewives, small shop owners, taxi drivers and even the local banana seller.
He eventually slipped up.
The 2-year chart shows us the later part of the Wok base in detail and it is very useful as it reveals that within the larger basing pattern a fine Cup & Handle formation has developed, which is now approaching completion. The duration of the Handle part of the pattern has allowed time for the earlier overbought condition resulting from the sharp rise out of the Cup to neutralize and for the moving averages to partially catch up. The bullishly aligned moving averages support a breakout soon above the resistance marking the upper boundary of the pattern, which extends up to 3,600.
The 6-month chart enables us to see the Handle of the Cup & Handle base in detail. From when it started to develop in July it has taken the form of a Rectangle but has recently morphed into a bullish Ascending Triangle whose rising lower boundary looks set to force an upside breakout soon.
Whilst we cannot entirely rule out that the setup will abort, the most likely outcome is judged to be a breakout leading to a phase of vigorous advance, quite possibly similar to the Bubble or Son of Bubble runups shown on the 20-year chart.
Anyone wanting to play a potential big rally in the Chinese stock market from here, using a vehicle on the U.S. markets, could consider the Direxion China Bull 3X Shares, code YINN, $19.40 but be aware that this is a leveraged, volatile counter that can be brutal if it moves against you. Fortunately, at this time it is moderately priced with plenty of upside potential if the Chinese stockmarket takes off higher as expected.
End of update.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years' experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.
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Charts provided by the author.
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The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr. Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stock market analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund's opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.
