Are Chinese stocks the canary in the coal mine?
Kim Cramer Larsson
Technical Analyst, Saxo Bank
Despite the ongoing trade war between the US and China, Chinese stocks have been trading sideways for the past two months between 12.000 and 13.000 (China 50 Index). Looking at the bigger picture, however, the China 50 Index is testing its medium- to long term strong support at around 12.000.
That level could prove to be crucial.
A close below that point could fuel a further sell-off, taking the Index down another 10-15% to support around 10.000.
Looking at the medium to to longer term, Chinese stocks are in a de facto bear trend. To demolish that picture, a break above 13.000 is needed.
The bear trend in the China 50 index has had a spillover effect into the Hang Seng 50. This index is very close to testing support around 29.125; a close below this support level could have widespread consequences.
First, a short-term drop to the 28.000 area is likely but there is not any real strong support before the 24.400-25.000 area. Worse yet, a massive sell-off could have worldwide contagion effects.
In the US, the Dow Jones Industrial index looks very similar (chart included below), although it is not as close to its crucial support around 23.360 (approximately 5% below current levels).
After a close below that support level, there is no strong support before around 20.000 – and the technical structure of the S&P 500 is similarly positioned.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.