Over last two years China has been in middle of
slowdown. Most of the market strategists believed that China will bounce back
and won’t have a hard landing while handful like Michael Pettis have maintained
their views that Chinese GDP growth will go below 5%. Till now markets have
sided with bearish view. Chinese markets fell from 3000 to 2000 in last two
years.
Readers may remember that in my post on June
16th 2011 I wrote, “In the given chart of Shanghai we can see that the current
price level is very near to its long term trend which started from 1990. If the
index close below 2500 level this will indicate a break down in trend. In that
event I expect a massive correction in Shangahi Composite. If we look at the yearly candle stick chart
of Shangahi it indicates that it may be forming evening star pattern. Since
this pattern is not forming at the top the impact of this bearish formation
will not be very severe. But still if Shanghai composite closes below
2500 it may correct up to 2000 or 1800 levels”
My call on shanghai has almost been prophetic
and the index have corrected severely. I still maintain my bearish view on
Shanghai but I think at this point risk reward is very favorable for taking a
long trade on Shanghai Composite. CMP of
Shanghai is 2027. Traders can go long on Shanghai with a stop loss of 1980 and
target of 2200.
I won’t be bullish on Shanghai composite unless
it breaks convincingly above 2200 levels. I am expecting that after a pull back
upto 2200 Shanghai composite will resume its downtrend and will break below 2000
levels. Target in that case would be 1800, and 1700.
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| Shanghai Composite - Weekly Chart |
Also S&P 500 pulled back sharply as
expected in my previous post on 16th November.
Some thoughts on Macro Economic Analysis
Equity market index are said to be leading
indicator for predicting economy. I have
seen that most of the time macro economist fails to predict economy on the
basis macro economic analysis, especially when economy swings from pessimism to
optimism and vice versa. In any downturn
stock index are the first to move up (down) while macro economic data improves
(worsen) with a lag of 6 – 12 months. Therefore if we are able to predict (with
some degree of certainty) the movement of index it should serve as an adequate indication
of economic condition which ought to prevail few months down the line.
Hence an accurate forecast (with use of
technical analysis) can give us insight not only about index movement but also about
interest rate, currency, geo politics, and mood of people in an economy. I have
used index forecast successfully in ascertaining macro economic conditions
twice in case of India and China.
My post on Indian markets written on 30th
November 2010 gave sufficient indication that Indian economy will worsen
even when IMF was projecting that Indian GDP will grow by 9.4%. Similarly my
post on China on 16th June gave ample indication that deceleration
of economic growth in China will be faster than expected. In both cases macro
economist and market strategist have lagged the market substantially. Also in
both cases they refused to believe enormity of down turn until data got
negative but by that time Indexes have already lost 20% – 25% in both markets.
I
have always believed that technical analysis is useful not only in forecasting
price of index of stocks but also helps in predicting the direction of macroeconomic
data (circumstance) in the future. When technical analysis is used in tandem
with fundamental analysis and macro economic analysis to arrive at conclusion the probability of predicting correct trend
increases manifold.
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