SINGAPORE (June 24): Markets in China and the US have jumped on the confirmation that President Xi Jinping and President Donald Trump will meet at the G20. The market reactions look similar, but they come from different causes. It seems unlikely that both rallies can be correct; only one can hold true.
In the US, this is a relief rally that can just as easily crash if Trump decides to send another tweet. The rally in US markets reflects the tweet-driven whipsaws that have characterised US markets for many months. The rally builds on Trump’s apparent success in forcing Mexico to give in to US demands.
It could be described as a victory rally predicated on the belief that the US will win the US-China trade war, with Xi bowing in submission at the G20 meeting.
The rally in the Shanghai Index belies this interpretation. If China markets sensed a US victory, then the market reaction would be bearish, as any deal would be weighted heavily in favour of the US. The rally in the Shanghai Index is not a relief rally. It is a rally based on a firm belief that the outcome of any G20 discussions will be, if not to China’s advantage, at least a reaffirmation of China’s firm interests.
Foreign observers tend to underestimate the genuine support for Xi’s position and the determination not to surrender on issues that are fundamental to the operation of the Chinese economy. There is a clear, if understated, support for the government and its policies. The idea promoted by some US commentators that China will restructure its economy because it does not enjoy the support of the Chinese people is not supported by reactions on the ground.
It is a common theme that the disruptive democracy on exhibit in the US is not suitable for China, which faces many different types of challenges and has a genuine commitment to lifting people out of poverty.
The rally in the Shanghai Index is driven by a belief that Xi will not back down. The meeting is an example of the success of Chinese steadfastness in the face of bluster.
These attitudes have on-the-ground consequences because this situation is quickly sorting out true friends from fair-weather friends. Loyalty has a high value in China, and this forms the foundation of long-term sustainable business. MNCs can rely purely on transactional business for survival. Middle-sized and smaller companies need more glue to keep business intact. Loyalty is one of these glues.
This is not loyalty of the same level as the Peach Garden Oath, where three strangers, Liu Bei, Guan Yu and Zhang Fei, take an oath of fraternity and became sworn brothers. It is a plot foundation in The Romance of The Three Kingdoms and frequently used as an example of loyalty.
This is a loyalty reflected in a willingness to stay engaged with business and business development even as these relationships are made more difficult by external factors such as tariffs and trade wars. It means remaining committed to doing business despite difficulties.
Those who remain loyal in this situation will be well rewarded when the situation is resolved. Those who walk away surrender not just current business but any chance of resuming business in the future on favourable terms.
Technical outlook for the Shanghai market
The bullish breakout in the Shanghai Index has accelerated with a gap-up day on June 19. This has developed a close above the upper edge of the long-term group of averages in the Guppy Multiple Moving Average indicator. This is a strong rally and a strong breakout above the upper edge of the down-sloping triangle pattern.
The initial upside target is near 3,040, which is also near to the value of the historical resistance level.
The breakout activity further confirms the Relative Strength Index divergence signal. The RSI values have rebounded from the up-sloping trend line on the RSI display. The breakout is confirmed with a strong rally move above the downtrend line that defined the upper edge of the down-sloping triangle.
Chart patterns allow traders to calculate high-probability price targets. The base of the down-sloping triangle pattern is used for the measurement. The base is the vertical distance between the start of the sloping trend line and the horizontal support level. This value is measured and then projected upwards from the point where price moves above the downtrend line. The current measurement for the target calculation starts from the day of the gap-up breakout.
There is a good probability that the rally will develop into a new uptrend because the Shanghai index downtrend is relatively weak. The GMMA trend has been down, but the long-term GMMA has narrow separation. This suggests that investors are cautious rather than bearish. The narrow separation shows investors are only mildly bearish, so investors are more likely to join the rally breakout.
The breakout target calculated from the triangle pattern is independently confirmed by other features on the Shanghai Index chart. The index has a historical resistance level near 3,040.
The combination of four bullish features suggested the market was primed for a rally. The bullish features are the successful test of support near 2,840, the RSI divergence pattern, the rally breakout above the upper trend line in the triangle pattern and the narrow separation in the long-term GMMA.
Traders and investors watch for the short-term GMMA to move above the long-term GMMA because this is the first confirmation of a new sustainable 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
