Share this
Digg
Del.icio.us
StumbleUpon
Netscape
Yahoo
Technorati
Googlize this
Facebook
Export PDF
Print
E-mail
IS IT OVER for China? Is it time to sell China? These questions have dominated the newswires in the latter half of last week as the Shanghai Index moved to retest support in the 2,600 area. The answer is that one phase of the China market recovery is over, but a new one is beginning. The rest of the world is debating an alphabet soup of L-, W- and V-shaped recoveries as markets develop recovery patterns. Think of the China market as creating an inverted L-shaped trend pause. This is where the rapid uptrend pauses and consolidates. It is the end of momentum, but not the end of the uptrend.
Part of the reason for this is the focus on developing domestic economic strength. China’s State Council introduced a series of sweeping measures to boost small and medium-sized businesses. Small businesses create most of the jobs in China, and the government has a priority on the steady development of the sector.
As a result, tax cuts and relief are at the top of the list. The corporate income tax rate has been cut from 25% to 20% for small businesses whose annual taxable income is less than RMB30,000 ($6,220). Remember this amount is larger than the average annual income in China.
Beijing also announced new measures to encourage financing for small business. The government said it would cover a part of any bad loans that banks incurred from lending to small and medium-sized businesses. It is a move designed to encourage banks to boost their smallbusiness lending. Management-skills training will be offered to one million managers in small companies over the next three years.
The government is encouraging private capital to participate in the reform of rural cooperatives to give small businesses more financing options. A new scheme allows qualified small-sum loan companies to transfer into rural commercial companies and opens up a new source of financing for rural areas. This is economic infra structure building beyond the high-profile bridges and roads. It is not a sprint but a marathon, and the market correction should be seen in this context.
Market corrections have two behaviours: a correction in price and a correction using time. The Shanghai Index is developing both types. A correction in the market develops when the market index moves back to the underlying longterm trend. This is a correction in the long-term trend activity and not a change in the direction of the long-term trend. The long-term trend in the Shanghai Index can be defined with the long-term trend line. This trend line starts in December 2008. On Aug 19, 2009, the value of the long-term trend line is near 2,759.
The market quickly moved back to near the value of the long-term uptrend. In August, the market fell from the peak index value of 3,478 to 2,761, which is near the value of the longterm uptrend line. This 20% fall is a correction in price. The rapid fall reduced the Shanghai index value to near the value of the long-term uptrend line.
A correction using time does not involve a dramatic fall in price. Such a correction develops as a trading band or consolidation pattern. In this situation, the index moves sideways for several weeks or months until the index value is equal to the value of the longterm trend line. When the index value hits the trend line, then a trend rebound develops. The long-term trend line provides a support level and the index continues to rise, following the long-term uptrend line.
Usually, there is either a price correction or a time correction for the uptrend. The current Shanghai Index situation is different. The index first has a price correction and now it is developing an uptrend correction using time. The correction is developing in the area around the long-term uptrend line. When the time correction is completed, it will define the position of a new uptrend line.
The correction using time develops a sideways trading consolidation band. The upper edge of this trading band is near 3,000. The lower edge of the trading consolidation band is between 2,600 and 2,800. The index activity in the next several days will confirm the correct level for the lower edge of the trading consolidation band.
The signal for long-term uptrend continuation develops when the index breaks out above the upper level of the trading consolidation band near 3,000. The width of the consolidation band is used to calculate the first target for the breakout, which is 3,200 and 3,400. There is a higher probability that the market will continue with the long-term uptrend with a successful breakout above 3,000. The breakout from the trading consolidation band will also establish the correct position for the new long-term uptrend line.
The signal for the development of a downtrend is when the index moves below the lower edge of the trading band near 2,600. The width of the trading band suggests a downside target near 2,200.
!
