Sunday, August 9, 2009

Shanghai Composite Index Chart Pattern - Aug 07, '09

We had a recent look at the Shanghai Composite index chart pattern when it was compared with the KOSPI (Korea) index chart pattern. The one way rally of the China index from the low of Mar '09 was looking a bit stretched.

Since China and India have produced two of the best performances among world stock indices in 2009, it may be a good idea to take a more detailed look at the 6 months closing chart pattern of the Shanghai Composite index (in blue) and compare it with the BSE Sensex index (in red).

ShanghaiComp_Aug0709

After underperforming during Feb and Mar '09, the Sensex outperformed the China index during May and Jun '09. The Jul '09 Sensex correction brought the two indices close together, and lately the two indices seem to be copying each others' moves.

Of special interest is last week's correction in both indices due to unloading by the FIIs. The Dow Jones (DJIA) index and the FTSE 100 index, which had hugely underperformed both the Shanghai Composite and BSE Sensex indices, actually went up during the past week on increased volumes.

That may be an indication of a reversal of the FII money flow - from Asia, back to Europe and the USA. Will it be just a temporary one week phenomenon? Only time will tell. But if it continues, then expect Asian indices to correct more while US and Europe indices move higher in the near term.

Let us see what the technicals are indicating. The 20 day EMA is trying to support the index. The 50 day and 200 day EMAs are still moving up. Bulls need not worry about the longer term. Shorter term, things could change in a hurry.

The slow stochastic has dropped from the overbought zone with the %K line below the %D. The MACD is positive, but has started to fall and has gone below the signal line. The ROC has dropped sharply and is now in the negative zone. The RSI is above the 50% level but slipping. All indicators are looking bearish.

Bottomline? The Shanghai Composite index chart pattern may correct some more. The next support should be at the 3100 level and the 50 day EMA. If that level is breached, there may be a bigger fall. Investors can book partial profits. New investing should be on hold.

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