SINGAPORE (May 27): How can you destroy a strong industry competitor in three easy steps? US President Donald Trump’s most recent executive order in relation to Huawei Technologies has shown the process, and investors need to be worried, very worried. This decision affects companies all the way along the supply chain, with adverse investment impact on companies which, at first sight, seem far removed from Huawei.
More importantly, from an investment perspective, the use of an executive order to destroy a commercial competitor means that potentially every other competitor to US products or services is under a similar threat. Already, Trump has declared that high European Union car exports to the US are a threat to US national security.
The Huawei executive order did not just suddenly appear. It has a precursor in the executive order that imposed tariffs on steel and in the forced decision by Beijing-based Kunlun to sell its investment in Grindr.
Here are the steps. The first step is to use the power of the government office to attack and undermine the reputation of the company. This was achieved with allegations that Huawei posed a security risk. The nature of this risk was darkly hinted at, but not a shred of evidence has been provided to back up the claim. Huawei offered full access to its systems for independent inspection, but this offer was rejected.
The best reason offered was that Huawei could be forced by the Chinese government to undertake unspecified actions. It seems this is no different from Google being forced by executive orders to undertake actions at the request of the US government.
The second step is to force price increases on the product or services by imposing very high tariffs. This forces up the price to a level above that of its US competitor — the iPhone. This has an impact on sales revenue, but costs are borne not by Huawei, but by the US consumer.
The third and most dangerous step is to disrupt the logistics supply chain. Under direct government instruction, Google, Intel, Qualcomm, Xilinx, Broadcom and others are forced to withdraw product and services support for Huawei.
Shall we apply these three steps to electric cars? There goes your investment in BYD Auto. To washing machines, air conditioners and refrigerators? There goes your investment in Haier Electronics Group.
To Chinese investment in international business? There goes your opportunity to attract Chinese capital.
To companies that are supplying China with raw materials — materials that are suddenly deemed strategic? There goes your investment in Australian iron ore producers and other commodity investments.
Let us take this a step further and consider the status and security of Chinese companies listed on the Nasdaq and New York Stock Exchange. It is not a step that is inconceivable under the rules of executive orders that bypass the authority of Congress. If Huawei is a security threat, then the same can be alleged against Tencent Holdings, the owners of the potentially subversive WeChat service, or Alibaba Group Holding, and the list continues.
This is a trade war, not a tariff war. A trade war is designed to destroy competitors and give unfair advantage to companies and colleagues that you favour. The investment impact is dramatic and cannot be ignored.
Technical outlook for the Shanghai market
The Shanghai Index is particularly compatible with the relative strength indicator divergence signal. The last nine days have seen the development of a bullish RSI divergence signal. It is not as strong as the bearish RSI divergence signal that developed prior to the market retreat in April, but it still suggests there is a good potential for a rebound and the development of a new uptrend.
April saw the development of the strongest type of RSI divergence.
The trend line along the peaks of the Shanghai Index (A) moved in the opposite direction to the trend line placed along the peaks of the RSI indicator (A1). Additionally, the peaks in the Shanghai Index activity were separated by several weeks.
The current RSI divergence pattern has a different structure.
The index has two equal lows separated by six days. The lows are connected by a horizontal trend line (B). The lows in the RSI indicator for the same period are connected by an upsloping line (B1). This is the weakest of all RSI divergence patterns, but it is still a bullish indicator.
The Shanghai Index has consolidated between 2,840 and 2,960. This consolidation pattern shows the strong selloff has ended.
Traders have become more confident that the retreat has been arrested and they are entering the market as buyers.
The long-term Guppy Multiple Moving Average reflects the way investors are thinking. The long-term GMMA has also turned down, but it is not a rapid decline like the compression and decline seen in February 2018. This shows that investors are nervous but have not panicked. This narrow compression in the long-term GMMA offers less of a resistance level for any new rally rebound.
If support near 2,840 is successful, then a rebound rally has three immediate resistance obstacles.
The first resistance feature is the value of the upper edge of the short-term GMMA. The second is the value of the long-term GMMA. This has compressed, so the value is near 3,000. The third resistance feature is the historical resistance level near 3,040.
The best upside target for a rally rebound is near 3,040. If support near 2,840 is broken, then the next strong historical support level is near 2,700.
The area between 2,700 and 2,840 acted as a broad trading band during 2018. Traders and investors are alert for the potential for this trading band to again act as a support and consolidation area.
Activity within this consolidation area may also develop into the conditions for a stronger RSI bullish divergence pattern.
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.
