(Oct 11): "I’ve got a little list of society offenders... who would never be missed,” sings the Lord High Executioner Ko-Ko in the musical The Mikado. With exquisite timing, US President Donald Trump has produced his little list of Chinese companies that will be banned by the US for their alleged involvement in human rights abuses in China. Exquisite timing because this announcement was made just days before the next round of US-China trade talks.
This, along with his sudden withdrawal of support for the Kurds that caught even the US Army by surprise, is just the latest twist and turn from Trump.
The message from ordinary officials in the provinces to more highly placed leaders in Beijing is the same: They are tired of dealing with an erratic US president whose word is worth nothing and whom they cannot trust. Beijing is restrained in its official comments, but far less restrained in off-the-record conversations.
This feeling is not confined to China. The Europeans, North Atlantic Treaty Organization allies and others that have traditionally been aligned to the US are also confused and caught flat-footed by tweets that have massive strategic consequences.
All of this is helping to slow the momentum in US markets and drive the Volatility Index indicator to increasing highs. The VIX is a measure of the expectation of trend change in the market. It is often called the fear index, but it measures not fear. Rather, it measures the increase in the belief that the current trend will change.
Washington’s decision to effectively blacklist 28 Chinese technology companies last week because of alleged human rights abuses in Xinjiang has implications for every Chinese company — not because they are involved in human rights abuses, but because they too could be blacklisted by presidential tweets at any time. The action against Huawei was a precursor to this politically driven commercial warfare designed to cripple China’s aspirations to maintain technical leadership.
Some of these 28 companies are listed or were considering IPOs. They stand at the cutting edge of many services, including the facial recognition services that enable a swift passage through China customs. The rapid and smooth entry into the 2018 China International Import Expo in Shanghai used these services, as does the AliPay Smile-to-Pay service. Like all technology, it can be used for desirable and less desirable outcomes.
Applying the same criteria, Remington and Northrop Grumman, among others, should also be blacklisted, along with a host of other US companies that provide weapons and services that facilitate alleged human rights abuses in Saudi Arabia, Guantanamo Bay and Yemen. It is the use of political weapons to achieve commercial outcomes that is of most concern to investors when it comes to making portfolio decisions.
Responding to concerns raised, economic adviser Larry Kudlow was forced to dispel the idea that Chinese companies would be suspended from trading in the US. His denial was not convincing. Investors in these US-listed Chinese companies would do well to be concerned. Sovereign risk, once limited to small African countries, is now a major concern in portfolio and investment calculations. Some investments in US markets can no longer be considered safe, owing to sovereign, or tweet, risk.
Technical outlook for the Shanghai market
The pattern of retreat in the Shanghai Index continues. It has developed a more bearish aspect with a move below the major support features. The short-term Guppy Multiple Moving Average is testing the strength of support from the long-term GMMA. The index is developing consolidation around the historical support level near 2,920, and this has the potential to be bullish.
A strong breakout from a downtrend often has three parts to the pattern defined with the GMMA indicator. The current retreat is the third section of the GMMA trend breakout pattern. The retreat away from resistance is a normal part of the long-term uptrend breakout pattern.
There are three potential support levels to halt this retreat. The first support level is the value of the upper edge of the long-term GMMA. The level has failed.
The second support level is the lower edge of the long-term group of moving averages. This level has also failed.
The third support level is the value of the historical resistance level — now a support level — near 2,920. This level has become a consolidation level. The index continues to move around it. Traders and long-term investors watch for it to provide a base for a rally rebound and uptrend continuation.
However, the index could continue to fall towards the lower support level near 2,830 before developing a new rebound rally. This development would suggest a much weaker uptrend because of the resistance levels near 2,920 and 3,040. Investors would remain more cautious.
The potential future development of the breakout pattern is shown by the thick lines on the chart. Traders and investors wait for the pullback to successfully test the support areas before developing a new rebound rally and retest of resistance near 3,040.
The trend breakout and uptrend trend continuation are confirmed when the index hits these support areas near 2,920 and then develop a rebound rally that can move above resistance near 3,040. A breakout above 3,040 has an upside target near 3,120.
The GMMA indicator breakout pattern has three tests of trend strength. The first part of the pattern is a fast rally, following a significant downtrend (1). Traders wait for a retreat from the upper edge of the long-term GMMA (2).
The second rally carries the index above the upper level of the long-term GMMA to the resistance level near 3,040. The index consolidated near this level before developing the current retreat pattern.
The third part of the breakout pattern (3) is currently developing. This is when the second rally retreats and tests the support features. The index bounces away from this level and again moves decisively above the upper edge of the long-term GMMA. If this develops, then the rally has a high probability of moving above the resistance level near 3,040 and towards the longer-term resistance target near 3,120.
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.
