Foreign capital is leaving China. Let’s be clear, that’s big capital and big money and it gets frightened easily. But one of the more successful big capital investors, Warren Buffett, suggests that when others are running, it’s time to go hunting for bargains. In the China market, this is a statement worth pursuing.
It is important to recognise that most of us are not big capital. We are not the banks, the fund managers or the mutual fund managers. The amount of capital we move in the market is much smaller and that delivers advantages that are not available to big capital. We are smaller, quicker and able to move more deftly. It is a size advantage in any market and it also applies to the China market.
Some prefer to invest in the market, looking for early entry into growth opportunities like BYD. That’s where big capital is often lurking. Others look to the market to provide faster returns on capital over a shorter time-frame. They are often called traders; and for traders, the China market continues to offer excellent opportunities.
Take any day in the last week in the mainland China market. Around 40 stocks added 10% for the day. Remember that the China market locks limit up once a 10% gain has been achieved, so 10% for the day is the maximum return available.
For many of these stocks, this was part of a multi-day run, adding 20%, 30%, 40% for the week. This is a market where momentum counts. That is really good for smaller traders and investors, but not so good for the large-scale big capital funds, because they move too slowly to take advantage of these opportunities. They sneer at this type of momentum; but for the rest of us, this is where opportunity delivers.
Not all stocks traded in China are easily accessible to foreign traders. An increasing number is becoming available via the Cross Connect trading arrangement between the HongKong Stock Exchange (HKEX) and the two China exchanges in Shenzhen and Shanghai. The HKEX serves as the exclusive platform linking Chinese mainland-listed shares to global investors. The Chinese economy may be expanding slowly, but companies are growing larger and increasingly seeking capital market opportunities. The general index may be declining, but this obscures a myriad of bullish activity.
See also: China tightens securities lending rule to support stock market
In the past, numerous Chinese tech firms have sought listings in the US, but due to rising geopolitical tensions and concerns about potential delistings in the US, Chinese companies are returning to their home listings. These are expanding businesses.
The launch of the Huawei Mate 60 is a clear indication of the limitations of US attempts to stifle technological advances in China. The unintended consequence has been to boost the activity of China-based tech companies, and these are offering excellent capital growth.
All of these features mean that China is not a market we can afford to ignore. Accessing the market is getting easier, which is why the expansion of HKEX Cross Connect services is seeing a surge in trading volume.
See also: Eight reasons why I am still in favour of China stocks
Technical outlook for the Shanghai market
Rebound rally or trend change? This is the key question with the Shanghai Index which is at the most bullish it has been for months. The current activity is certainly more than a rally because the index activity has included both retreats and rebound continuation.
However, the move lost some momentum as it encountered the lower edge of the long-term moving averages in the Guppy Multiple Moving Average (GMMA) indicator. After a brief and small re-test and consolidation, the index recovered.
The retreat was a consolidation of the previous up-move, and acted as a base for a continuation of the uptrend. This is the most bullish outlook leading to the sharp rise on Nov 15. However, important resistance features remain in place that pit some limit on the momentum of any new uptrend development.
There were four strong resistance features which blocked the development of a sustained uptrend. Only the first of these has been breached and the other three remain under direct challenge.
The first feature is the value of the lower edge of the long-term group of moving averages. After a weak attempt, the index has moved strongly above this level. There is now some indication of compression in the long-term averages, which would suggest the beginnings of a change in investors’ assessment of the market.
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The second of these resistance barriers is the value of the historical resistance level near 3,080, which is currently being tested. It is most probable that the market will test this level several times before a successful breakout develops.
The third resistance feature is the upper edge of the long-term GMMA. This is also now almost the value as the resistance level at 3,080. A trend change is signalled when the index is able to close above and stay above this upper edge of the long-term GMMA. This group of averages should also show rapid compression as investors agree about price and value.
The final resistance feature is the long-term downtrend line. The horizontal resistance line and the trend line intersect around the end of November. A breakout near this period can be very powerful.
All of these resistance features are clustered closely together. A breakout above these combined features will be very strong with an initial upside target near 3,180.
Currently, this remains a more bullish situation than in previous weeks. The potential for a rapid breakout continuation is increasing.
Daryl Guppy is an international financial technical analysis expert. 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 former national board member of the Australia China Business Council. The writer owns China stock and index ETFs
