Shanghai breakout tests resistance
There seems little doubt that the "phase one" of the US-China deal will be signed, signed. China has announced Vice Premier Liu He will sign the first phase of the trade deal with the US in the week starting Jan 13. This is reflected in the 5% rise in the Shanghai Index. US trade advisors trumpet this as an American victory but there are sizeable advantages for China. The timing will be disrupted by the events in the Middle East. The key indicator of victory will be the relative status of those signing the phase one document. Liu He is ranked number four of the four Vice-Premiers.
American pressure has enabled the Chinese leadership to overcome resistance from economically conservative elements and speed up the implementation of systemic reforms. Other apparent Chinese concessions, such as buying more agriculture produce from the US, satisfy projected growing demand and these may have occurred in the natural course of events.
Equally as important as the phase one signing is the collateral impact this will inflict on other markets. A resumption of trade flows will help boost the Singapore economy and smart investors will look to move into companies that had previously been adversely impacted.
For those with international exposure, the impact is different. Australia, for example, will lose China market share to the US in natural gas, beef, wine, and perhaps coal. That comes on top of already significant hits to agriculture and tourism as a result of the bushfires in Australia. Investors may need to rebalance international portfolio exposure.
Jan 1 saw the implementation of the New Foreign Investment law regime. This represents a significant strategic shift in China's approach to the role of foreign investment in China's economic growth. This is an overarching statement of a shift in policy direction rather than a precise legislative prescription. Some foreign observers have lamented this lack of detail, but to focus on this is to miss the strategic importance of the Investment laws. The details of implementation and application will be worked through in coming months and this presents an opportunity for Business Councils and multilateral representative bodies like the Silk Road Chamber of International Commerce to identify problems and present solutions.
The law sets the strategic vision for further opening the Chinese economy by diversifying the cooperative landscape to ensure continued economic growth. The law also opens the path to capital diversification and greater integration with the world economy in ways that go beyond being just a supplier of goods.
The sleeper issue, largely unnoticed, is the rapid progression in the development of a sovereign digital currency framework. China’s central bank’s annual work conference held in Beijing recently confirmed the project is progressing smoothly. There are plans to test digital currency electronic payment in Shenzhen and Suzhou. The digital yuan will be first distributed to commercial banks and users and businesses can register digital wallets with these commercial banks. This will change the domestic and international payments framework.
Technical outlook for the Shanghai market
The Shanghai Index rally moved rapidly above the major resistance level near 3,040 and is consolidating near the first upside target around 3,120. The second upside target is near 3,600. The longer-term 2020 target is a retest of the previous highs near 3,280. The fast rally is part of a recently established uptrend and the index is clustered along the upper edge of the short-term group of averages in the Guppy Multiple Moving Average indicator. The rally has carried the index well above the uptrend line so there is the potential for a consolidation and retreat around the 3,120 level.
The Shanghai Index has four chart features which define this uptrend and breakout. The first feature is the breakout above the downtrend line and the subsequent retest of this line as a support area for the current rally. This downtrend line started in September and was anchored on the rally highs in October and November. The breakout above this line is a classic breakout, retreat, retest and rebound pattern associated with sustained trend reversals from downtrend to uptrend.
The second feature is the development of a new uptrend that incorporates two sets of rally behaviour. This is defined with a trend line starting from the Dec 3, 2019, low of 2,857. The trend line has a second anchor point on Dec 12, 2019. This is followed by a series of confirmation anchor points that hug the trend line from Dec 24, 2019, to Dec 30, 2019. This provides a trend line that has been successfully tested multiple times as a support area. This is the line that will be used to define the long-term uptrend.
The value of this line is near to the value of the previous strong long-term resistance level. These two features may act as strong support features for any Index pullback in reaction to the developing conflict in the Middle East.
The third chart feature is the breakout above the long-term resistance level near 3,040. This has been a resistance feature since July 2019, defining the five-month sideways trading pattern. This makes the move above this level particularly significant because it signals a change in trend behaviour. The initial breakout target is near 3,120 and this has almost been achieved. The next target near 3,600.
The fourth feature is the Guppy Multiple Moving Average relationships. The long term GMMA has turned upwards and has begun to separate. This shows good investor support for the developing trend.
The short term GMMA is also well separated. The pullback from 3,040 in December did not cause the short term GMMA to dip and touch the long term GMMA. This is a bullish condition with steady separation between the long- and short-term groups of averages.
Additionally, the lower edge of the short term GMMA is near to the value of the trend line. The value is also near to the value of the longterm resistance level. This provides more support features for the developing uptrend.
There is a high probability of a consolidation near 3,120 followed by a temporary retreat may be accelerated by events in the Middle East. This will be an attractive entry point for many investors so there is a good probability of a strong rebound and a continuation of the 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 Council.