The Shanghai Index has undergone what some are calling “wild gyrations” over the past few weeks.
It is a pejorative term that seeks to lay the blame at the feet of retail investors and traders who ‘stir-fry’ the market with short term trades. It is also a convenient cover for ignorance and those who accept that miss the developing opportunities.
The characterisation of the China financial market as a casino dates back to the early days of the establishment of the Shanghai and later Shenzhen exchanges.
In the first listings of previous State-Owned Enterprises, there were some very dodgy practices.
Over the following 30 years, the market has changed and matured. It is now a genuine competitive alternative to US markets with their cowboy ‘pink slip’ trading, and the European and UK bourses.
Despite these changes, there is still the perception that this is a cowboy market dominated by retail traders that effectively make this a casino.
These conclusions ignore the fact that intraday trading is still prohibited in China equity exchanges, and has been since their foundation.
Day trading simply does not exist. The average holding time for stocks on the New York Stock Exchange is less than 20 seconds as the high frequency traders have come to dominate this market.
So, the idea that short-term trading distorts China, but not New York, is untenable.
So too is the idea that the China market is dominated by retail traders.
The influence of retail investors in China’s stock market is fading as institutional dominance grows.
This is in contrast to a global surge in amateur trading like GameStop that has made headlines in Western financial markets. Professional investors’ holdings of freely floating shares in Shanghai and Shenzhen climbed to more than 70% between June 2015 and June last year, according to investment bank China Renaissance.
They say 67% of China onshore turnover is related to institutional-type trading activities.
So why the ‘wild’ gyration in the Shanghai Index? That is because every market has its own characteristics and behaviours.
The Australian Stock Exchange behaves very differently from the Straits Times and the Nifty 50.
The behaviours reflect attitudes to investment, taxation rules and types of investment instruments available as alternatives deployments of capital.
The pattern of fast rises and fast retreats is a characteristic behaviour of the China market. It is not de facto evidence of a casino approach.
Like the US markets, the China market is very responsive to the action of regulatory authorities. The triggers may be different — the People’s Bank of China (PBOC) announcements rather than an announcement from the Fed — but the triggers act in the same way on market performance.
We more easily understand, and anticipate the impact of Fed announcements. However, we have less understanding of PBOC announcements and therefore see the market reaction as something that is largely unexplained.
The China financial markets do not offer the same low volatility trend comfort as US markets but they continue to offer long term investment and short-term trading opportunities.
The volatility is something to be managed, rather than rejected. If we blind ourselves to these opportunities by dismissing this as a casino-like result of retail domination of trading then we are truly missing the changes in the big picture.
Technical outlook for the Shanghai market
The long-term resistance feature on the Shanghai Index near 3,450 sits at the upper edge of the longterm trading band that dominated the Shanghai Index behaviour for the second half of 2020.
This resistance feature continues to offer a formidable barrier to a resumption of the long-term uptrend.
The Index has made several attempts to break out above this level but each attempt has failed. There is a high probability that the index will continue to develop a consolidation pattern below the resistance level near 3,450.
This pattern includes weak and limited breakouts above 3,450.
The failure to break above 3,450 suggests a return to the long-term oscillation behaviour of the index that was also a characteristic of the second half of 2020.
In this period, the index movement was confined within the broad trading band that dominated the Shanghai Index from July 2020 until January this year.
The first feature of this trading band is the strong resistance level near 3,450. The index is regularly testing this level as resistance following the rebound in the last week.
The second feature in the trading band is the support level near 3,360. This level has been successfully tested following the strong retreat starting February this year. The rally rebound developed from this level but 3,360 is again under test.
The third feature of the trading band is the strong long-term support level near 3,240.
This acted as a major support level during the last six months of 2020. This represents an extreme downside target for the current index activity.
The fourth feature is the midpoint of this broad trading band located near 3,360. The Index has oscillated around this level during the last six months of 2020.
The market was bullish when it remained between 3,360 and 3,450. The index was bearish when it was between 3,240 and 3,360.
Current rally and retreat activity are in the upper half of the broad trading band and this is bullish even though no strong breakout trend behaviour has developed.
A breakout above 3,450 has an upside target near 3,540. A downside breakout has a target near 3,240.
It is clear that the longer-term uptrend which rested on broad separation in the long-term group of averages has been broken.
Investors have become significant sellers as shown by the compression in the long-term Guppy Multiple Moving Average (GMMA). Any rally rebounds in the near future will continue to be limited by strong resistance near 3,450.
