Shanghai Stock Index Broke the 2010 Low, Wait For Soft Landing on the Chart

Img: Shanghai Index intraday (Bloomberg)
The Shanghai Stock Exchange Composite Index closed at 2,248.59 today, down 1.87%. Yesterday it confirmed a break below the July 2010 low (2319.73), which is now resistance. It is interesting that the Shanghai Stock Composite Index is now testing the 2001 peak (2,245) as a potential support level. If that level breaks, $SSEC could double dip to the October 2008 low (1,664.92), which would probably signal a hard landing for the economy. However, if the Chinese government enacts "pro-growth policies" to engineer a soft landing, it could engineer support levels on the chart as well.

As you can see in the chart below, the Shanghai Stock Exchange Composite Index increased more than six-fold from 998 to 6,124 between 2005 and 2007, but retraced most of its gains when markets crashed globally. $SSEC bottomed out at 1,664 on 10/28/2008 and has been trading in a range ever since between 1,664 and 3,478. So, Chinese stocks are in a bear market. And betting on China's amazing growth story has lost you money since the bear market rally peaked in August 2009. Hedge fund managers' Jim Chanos and Hugh Hendry have been spot on about China's economic slowdown. Chanos still thinks that China's real estate market "is in the early stages of a bubble" and there will be more credit losses.

As noted earlier, the Chinese government will intervene if they see the risk of a hard landing, but run the risk of inflation. Recently, China's economic growth and inflation rates have been slowing down, which is why the central bank (PBOC) lowered the reserve requirement ratio (RRR) for banks, and why tax cuts might be in the cards for 2012 to boost the economy.

The Shanghai Index has been trending down since August. For me to turn bullish on $SSEC, it needs to build a strong base and break through that downtrend line. Again, if the index continues to roll over, watch the 2,245 level, or 2001 peak, as a potential level of support. Maybe the Federal Reserve tries to backstop equities tomorrow in its FOMC statement. But there are still growth issues in Europe with the ongoing sovereign debt crisis and austerity measures in the eurozone. And the U.S. has economic and fiscal policy issues as well.


Shanghai Stock Index broke the 2010 low (Stockcharts)


Shanghai Stock Index testing the 2001 high (Stockcharts.com)


Recent articles on China:
Fitch: China Homebuilding Growth To Slow In 2012; Small Developers At Risk (Nasdaq)
TEXT:Fitch: Chinese Life Insurers Face Solvency Pressure (Reuters)
Chinese Real Estate in Early Stages of Bubble: Chanos (CNBC article and video)
China’s ‘Interventionist Policies’ a Concern, U.S. Report Says (BusinessWeek)

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