The title of today’s blog is a phrase that we used many months ago at an institutional meeting. Our feeling at the time was that China was a bubble and that the bubble had burst. In that sense, the fact that the Shanghai Composite lost 72% of its value in a year was a normal development, as was the subsequent 38.2% retracement rally that appears to have ended earlier this month.
As a result of the current decline, most (if not all) of the trend lines from last December’s test of November’s low have been violated, momentum is weak, and the pattern is orderly and impulsive. Moreover, sentiment is still bullish and this month's decline has already retraced 38.2% of the November-August rally. All of this suggests that this new downtrend will probe lower lows. We would not be surprised if the November lows are tested (and even violated), but we will pay attention to the 50% retracement level (2589) and the 61.8% level (2381) as potential roadblocks along the way.
China's Shanghai Composite
Meanwhile, the S&P 500 rallied 0.7% on Wednesday. Breadth was moderately positive, but volume was flat. Hourly momentum is in overbought territory even as the daily Coppock oscillator has a bearish bias for 22 of the 24 industry groups. These pressures still appear positioned to remain in force into the end of the month. Thus, we remain inclined to look for lower reaction lows before the post-July uptrend regains its footing.
A break of the 961 support area would imply further weakness toward Fibonacci (50%-61.8%) and chart support in the 944-926 range. The July low itself at 869 is still viewed as tactical support.
Chart and Fibonacci resistance in the 1007-1048 range had become increasingly stubborn and appears to have finally repelled the rally from July’s low. By definition, it is now benchmark resistance.
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