(June 12): Which do you believe? Market indices like the Dow Jones Industrial Average or the Shanghai Composite Index, or economic information such as jobs numbers and PMI (Purchasing Managers’ Index) figures? The answer is simple for traders. They believe the market index and trade it accordingly. Given the great disconnect, they should be trading with tight stops because mass demonstrations, civil disorder, manipulated jobs figures and record levels of unemployment make the market’s “irrational exuberance” look precarious.
Looking beyond this dissonance raises the question of maintaining global economic stability after the Covid-19 crisis has dissipated. To be sure, there is every indication it is going to be some time before this happens, but the expected shape of the global economy post-Covid-19 should be informing investment decisions we take now.
Although the focus is on the US, China and Europe, investors cannot afford to ignore developing and emerging markets. Instability in these areas impacts global economic stability. It is an issue I discussed at this week’s Global Think Tanks Online Forum hosted by five Chinese and five international think tanks. Former Australian Prime Minister Rudd; Nobel laureate for Economics, Joseph Stiglitz; and Zhu Min, former deputy governor of the People’s Bank of China and deputy managing director of IMF, were some of the speakers who provided outlooks.
The common theme was the need for greater cooperation in the face of a common threat. There is no room for division, and yet the potential outcome of the post-Covid-19 recovery can either add to the benefits of globalisation or accelerate the destruction of globalisation by replacing it with a new type of divisive Cold War built around protectionist sovereign economics. For many Western countries, the Covid-19 crisis has highlighted an over-dependency on China supply chains, fuelling calls for decoupling and economic sovereignty. For others, Covid-19 solutions cry out for enhanced international cooperation, including the provision of vaccines as a global public good.
Of these outcomes, it is the decoupling that is of most concern to investors because if undertaken, it devalues some existing investments. Where will Apple be without its Chinese assembly and supply chains, and what does this mean for your investment?
It is also a concern for the broader consumer market that has grown used to cheaper high-quality productivity-enhancing goods from China. Take these away and productivity falls. Take these away and some business models, including Walmart’s, collapse because they are built around cheaper profits from China. Take these away and the costs of production increase, giving rise either to inflation or a reduction in productivity. Costs rise because equipment costs rise, as industries take easy profits in a tariff-protected environment.
Investors who believe this division will proceed are already looking for investment opportunities in Indonesia and Vietnam. This is poor thinking because often, economic sovereignty entails shifting production home rather than shifting it to a non-China location.
China has a significant role to play in post-Covid-19 economic stability. The Shanghai Composite Index is more closely aligned to the economic reality than the Dow. Investors will need to more carefully consider direct exposure to this stable economy.
Technical outlook for the Shanghai market
The uptrend for the Shanghai Composite Index has remained strong, with the index clustering above the upper edges of trendline A. This is a significant change in the role of trendline A because it now acts as a support feature for the uptrend.
The index is also clustered along the upper edges of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This is a bullish confirmation feature found in strong uptrends.
The wide separation in the shortterm group of averages also supports a bullish analysis. This shows traders are very confident in the uptrend continuation because they are not selling into trend strength. The wide separation shows they are quickly buying into the trend whenever there is any weakness.
The first upside target for this trend rise is near 2,980. This is a long-term historical resistance level. A breakout above this level is very bullish. Beyond this, the next target is near 3,045. This resistance level was established in July 2019, and again in September 2019. It acted as a resistance area in February and March 2020.
However, the most likely outcome is a test of resistance followed by a retreat. The retreat has four potential support features. The first is the value of the lower edge of the shortterm GMMA, currently near 2,900.
The second support area is the value of the long-term GMMA. Currently this group of averages is compressed, so that the support is in the area near 2,875. A fall below this level encounters support near the value of the uptrend line B, currently near 2,870. Trendline B has three anchor points and defines the support features of the longer-term uptrend. This helps confirm the uptrend and also the strength of the line as a support feature.
The divergence in the two trendlines creates an environment of increased volatility. The current condition suggests the index could retreat more than 80 points to the lower trendline B and still remain in a longterm uptrend. Investors need to apply techniques to manage this larger volatility range.
Investors will also watch the behaviour of the long-term group of averages. This group has compressed and is now moving upwards and beginning to separate. This separation suggests investors are cautiously returning to the market and supporting the uptrend development. If a wide separation in the long-term GMMA develops, it would confirm strong investor support for the uptrend.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council.
