It’s not been a good last few years for the Chinese stock market. That may be in the process of changing, however.
As the weekly chart of the Shanghai index below shows, the downside momentum has abated considerably in the last year or so. Granted, the market did make a new bear trend low south of 1900 in the middle part of 2013. That was short-lived, though. Essentially, we’ve been looking at a mainly range-bound market since late 2012.
This is actually a potentially significant development for the global markets. To the extent that the Chinese market is an indicator of the health of the global economy, the stabilization of the Shanghai index at least offers a suggestion of potential better times to come. If the market can hold up from falling back below 2000 once more it would be a good indication turnaround potential.
If we think of the stock market as being a forward-looking economic indicator, then we can read some things into these developments in the Chinese market. Stabilization suggests that the worst is likely in the past at this point in terms of economic growth. This is a good thing for China, and for those countries which export to that market.
There is a lot of work to be done before we can declare any kind of turnaround to have actually taken place, though. The double top put in a bit below 2300 is the first major resistance to any potential bullish trend developing. A break clear above there would be a first positive step, but even then we couldn’t get overly positive from a long-term perspective until 2500 gets breached. This is the sort of thing which could take many months, if not multiple years, to actually happen. In other words we probably shouldn’t expect to see a lot of outwardly positive economic indications right away.
Given how narrow the Bollinger Bands have gotten on the weekly chart, there is definitely considerable potential in the Shanghai index. If an upward trend does start to develop (probably indicated in the intermediate term by a break of 2300) there could be some real power to it.