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.

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China 50 – weekly (source: Saxo Bank)

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.

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HK 50 – daily (source: Saxo Bank)
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HK 50 – weekly (source: Saxo Bank)
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DJI – weekly (source: Saxo Bank)

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