Next week brings China’s Fifth Plenum which will detail the 14th Five-Year Plan. Investors need to pay attention to the details of this meeting because it is as important as the US presidential election. The Plenum will set the environment in which the US will operate for the next five years.
This reflects a change in the balance of strategic relationships because it signals an unwillingly shared agenda. China and its policies are too important to be ignored. The times when China shaped its policies around the US policy framework have disappeared.
Four years ago, US President Donald Trump laid out his objectives for the presidency. In this election campaign, he has been more focused on insults and blame so there are few clear policy projections. However, many of the policy objectives of his “Four-Year Plan” have not come to fruition or have been only partially achieved.
This is in contrast to China’s Five-Year Plans which are much more successful in achieving their objectives, even despite the impact of Covid-19. For investors, this is an important feature because it provides a level of policy certainly not found in the current chaos in the US. US policy will mould itself in reaction to the Chinese Five-Year Plan, and that’s a very significant change in the investment landscape.
Chinese President Xi Jinping has already hinted at the broad strategic outlines of the Five-Year Plan. It includes the concept of a dual economy, which is an economy less dependent upon exports for its sustainability. This doesn’t necessarily mean reduction in Chinese exports, but it does signal the growth of a domestic economy aimed at satisfying the needs of the expanding consumer market. It suggests a reduced demand for imports into China and that threatens the business models of a number of companies which rely on exporting to China.
The growth and cohesiveness of the Belt and Road Initiative signals more product and commodity substitution, so what was once safe investment in one country may turn sour as the same products or services are imported from another source. Australian agricultural production companies are a good example of this transfer of investment opportunity.
We know that China will grow its digital economy and this momentum has been accelerated with the Covid-19 response. Wiring all of China for 5G, setting up the parameters of AI and the application of block chain to the sovereign digital currency all set a framework which will define the largest market in the world. The US is unwilling to co-operate in establishing common standards for the digital world, so investors will be forced to make a choice between a crippled economy and the world’s largest economy which has resumed growth. It is not a choice that is going to make the US very happy and it is going to pose a hard choice for many investors.
It is a choice already being made with the most recent Chinese government bond issues oversubscribed some 2.7 times.
The Fifth Plenum deserves as much attention and as much analysis as the US presidential election. Investors need to understand the investment implications of the policies coming from the Fifth Plenum because history has shown there is a high probability those policy outcomes will be achieved.
Technical outlook for the Shanghai market
A flag, a pullback, temporary retreat, or a trend change? It is an interesting set of questions for Shanghai Composite Index traders. The rally breakout above the upper edge of the long-term Guppy Multiple Moving Average (GMMA) indicator has stalled. The breakout above the value of trendline B has also stalled, but the outlook remains bullish for the index.
Is this a bullish flag pattern? It has the potential to be classified as such, but these patterns are not normally associated with index behaviour. The flag pattern reflects the physical behaviour around an individual stock rather than an aggregate index.
It is tempting to plot a flag and set an upside target near 3,450 based on the flagpole projection. However, this is not a valid analysis technique for this chart.
The index down-move is a pullback following the fast rally. It is a pullback to the support feature offered by the long-term GMMA. This long-term group of averages is well-separated and has not compressed in response to the pullback. This suggests the underlying trend remains strong. The pullback is a normal part of the market reaction to a fast rally. This behaviour does not provide a guide to further index development.
Combining the pullback with the GMMA relationships suggests this is a temporary retreat at the beginning of a longer-term uptrend. The evidence comes from the behaviour of the long-term group of averages. The wide and steady separation suggests sustained buying from investors. When the index pulls back, they have not joined the selling. If they had, then the long-term group of averages would show compression.
Instead the group of averages have remained in steady separation, and this is usually associated with buying activity on the price dips. The long-term GMMA provides a support feature. The index can fall to the lower edge of the long-term GMMA, and still remain consistent with a continuation of the uptrend.
The key warning signal is the development of compression in the long-term group of averages because this suggests that investors have joined the sellers. Currently the index is testing support around the upper edge of the long-term GMMA near 3,303.
All this behaviour suggests there is a low probability the current retreat is part of a trend change. However, a fall below the long-term GMMA also suggests the potential for the re-test of a trading band.
It is possible that the Shanghai index is developing a broad consolidation pattern with resistance near 3,340 and support near 3,220. This is a very broad sideways trading pattern or trading band. The pattern is proved when the index again successfully tests 3,220 as a support area, and when the index retreats from the resistance level near 3,450.
In this situation, the depth of the trading band consolidation is measured, and this value is used to set an upside breakout target. This is near 3,680. This analysis should be applied with caution as it is a long-term pattern development and target.
The evidence for the failure of this pattern is a sustained move below the support area near 3,210. This sets a downside target near 2,980. The trading-band development cannot be ruled out, but it is a low-probability outcome.
Traders watch for support to hold and for a new rebound rally taking the index above the previous rally high near 3,358. This is currently a good bullish breakout from the short-term downtrend. A new uptrend is confirmed with a successful test of support followed by a continuation of the rally behaviour.
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 two decades. 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
