Shanghai Composite analysis: is higher price trend slowing down?

Chinese retail sales dropped year-over-year in 2020 but outperformed given the prolonged virus pandemic

Shanghai Composite analysis                                 

The Shanghai Composite broke out in February and is now testing the breakout level, as global equity markets have pulled back after a robust rally at the beginning of February. 

Historically, the Shanghai Composite has experienced mixed returns during March. The technicals show that prices are trending higher, but the recent pullback in the index has led to a slowing of positive momentum. 

Chinese retail sales slowed in 2020

China's retail sales, which reflect consumption throughout the country, dropped 3.9 per cent year-on-year to 39.20trn yuan in 2020 as a result of the prolonged coronavirus pandemic. China actually recovered quicker than most western countries as the lockdown was put in place quickly and the population avoided a nationwide spread of the virus. Chinese retail sales are projected to return to positive territory in 2021, with double-digit growth even a possibility if large-scale vaccination campaigns can be realised.

Seasonality

The returns the Shanghai Composite has experienced during the past decade have been mixed in March. Over the past 10 years, the Shanghai Composite has decreased 60 per cent of the time but the average gains have been 0.9 per cent. The largest gain was more than 20 per cent and the greatest loss was 15 per cent. Over the past five years the Shanghai composite has declined 60 per cent of the time for an average gain of 1.7 per cent. 

Shanghai Composite technical analysis

The Shanghai composite broke out to five-year highs in February, and then retraced some of the gains, tracking back to the breakout level. Support is that breakout zone near 3,662. Short-term resistance are the February highs at 3,731. Additional resistance are the all-time highs near 5,176. The recent breakout has likely created a new range between 3,662 and 5,176. This would be negated if the price of the index closed below the 3,662 level. The 10-week moving average crossed above the 50-week moving average in June which reflects an upward trend that continues to perpetuate. 

Short-term momentum has turned positive as the fast stochastic, which is a momentum oscillator, generated a crossover buy signal. Prices are overbought according to the index level of the fast stochastic. The current reading is 89, above the overbought trigger level of 80, which could foreshadow a correction in the Shanghai index. The relative strength index (RSI), which is also a momentum index, showed divergence in early February. Prices hit a higher high, but the index did not follow through and make the same higher high which is a sign of decelerating momentum. Medium-term momentum is positive but decelerating. The moving average convergence divergence (MACD) histogram is printing in positive territory with a flattening trajectory which points to consolidation.

Shanghai Composite: how to trade it

The Shanghai Composite broke out to fresh highs in February and is now consolidating the recent gains. Prices are overbought, and medium-term momentum is slowing and showing divergence. Economic data in China is positive and, as the vaccination in China is rolled out, the economy should start to improve. The index should continue to move sideways during the balance of February and then experience a breakout in late March, ahead of earnings in April. 

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